On the Contrary

Most Americans are starting to understand what deep doo-doo we are really in.  This economic crisis isn’t some minor hiccup that could pass.  It could bankrupt all of us.  Tom Friedman has been trying to wake people up to the fact that next year at this time things are going to be worse, a lot worse.  In his Sunday column, “We Found the WMD”, he tried to wake up America to the problem.  They will eventually do just that as businesses close and many of us face losing our homes and economic security.  But what will come next is the anger.  In his column on Wednesday, “All Fall Down”, he started to identify what happened.

“So many people were in on it: People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made a fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.”

But it gets worse.  He quotes Michael Lewis of “Liars Poker”, a classic if you want to know how little morality there has never been on Wall Street, how the mangers were either grossly stupid or were in on the deal and knew it would all fail, but were in it to get their loot.  And as more people start to understand that these “Lions of Wall Street’ and the wonders of the marketplace was nothing more than a ponzi scheme to screw the rest of us there is going to anger, a lot of anger.

Now the initial problem is that banks won’t loan and the theory was that if we give them an infusion of cash, then they will loan.  But the Banks know something the rest of us are ignoring:  We have only seen the tip of the iceberg.  Banks know there is still a ton of bad paper out there not yet identified, but they don’t know who has it, so they don’t want to start the flow of cash to an institution that may not be around in a couple of months.  As Tom points out, we have no choice, we have to save them or we all go down.  But it hurts to bail out the people who really caused this thing.

The real problem right now is that the bailouts are based on old economic theory that you give the markets money and then you get out of the way or you hinder the invisible hand and screw up the whole thing.  What we really need is a piece of the action where the U.S. Government (we the people) can say here, have some money, lots of money, but you morons that got us into this thing, you are fired, there will be no bonuses, and if you don’t loan x% of what we give you, we will let you fail, and oh by the way, here are the new rules you will have to operate by.  Certainly we don’t want to go overboard and stop some investing that might look risky, but may be the venture capital for the next round of innovations.  But in the short term, we are going to have to take control because you need training wheels again to relearn you are part of the human community.

But here is the real lesson as your anger grows, that will be obfuscated by our friendly conservative zealots that got us into this mess who want to “cut spending and lower taxes”:  Conservative economic theory doesn’t work.  What we have had since Ronald Reagan is a belief that government has no role.  And they have proved it by, as James K. Galbraith put it in his book, “The Predator State”, “the systematic abuse of public institutions for private profit or, equivalently, the systematic undermining of public protections for the benefit of private clients.”  They have made greed king and they have promised you a free ride with the magic of the market place and trickle down economics.  It’s low taxes and no government and everything will be fine.  Let the Masters of the Universe create wealth for all of us.  And after 28 years of this nonsense we are in deep doo-doo.

And one last thing that may really make your head spin around.  Balanced budgets may not be a good thing.  Every time we focused on reducing the deficit to zero we killed our economy (this discounts the aberations of the Clinton years when the Dot Comm bubble had revenues up).  Savings may not be related to economic health on a macro-economic level.  Government spending isn’t necessarily bad and could in fact be the path to our salvation if it is invested in our future, not some hand out, stupid frivolous war, or tax cut.  The magical hand of the market place will not insure that the just get rewarded.  Putting money in the hands of citizens is not always the best answer, and governments have a major role in determining our path forward.  It’s called planning and our future depends on it.  Please don’t fall back on old ways of thinking that have put us right where we are right now, and that is in deep doo-doo.  Politicians are only good at spouting conventional wisdom to make you feel warm and fuzzy.  The way out of our economic disaster is going to be new thinking that makes you feel very uncomfortable.  Comfort is how we got here.