Would somebody please explain the economic crisis to me in 500 words or less?While I don't follow the news, politics, stock tickers, or anything relevant to the world with any regularity, I try to stay relatively informed on a general level. I stop by CNN.com to browse through the big stories, I watch The Daily Show and The Colbert Report (because I'd much rather be entertained than knowledgeable), and I'll read a newspaper every once in awhile. The news often baffles me in a "how can people be so stupid?" kind of way, but I can usually grasp the gist of what they're talking about.
Until this stock market collapse hit the news.
I don't understand a word of it. As far as I gather, a bunch of companies who deal in mortgages went tits up because they were promising more than they could deliver. These companies are somehow vital to the American economy, so President Bush proposed to give them 700 billion dollars to bail them out. Congress didn't want the money to be given with no oversight, so they revised the bill. Congress then rejected the bill they wrote themselves and started blaming each other for failing to do anything.
What the fuck is going on???
I never understood economics, and I still don't. Just today I had to go to Wikipedia in order to find out what "finance charges" are and why they're on my credit card bill. Now I'm being told by everyone on TV that I should vote for the presidential candidate with the best economic plan. Far be it from me to disagree with the TV, but I don't know how to pull that off. I may know the syntactic differences between "money," moneys," and "monies," but I don't know how any of them factor into an economic plan. Obama or McCain could pop on TV and say, "My plan is to find the pot of gold at the end of the rainbow," and I'd be going, "You know what? This guy's using his head!"
Unless you have a degree in Finance (I'm looking at you, Virgil), I don't see how the vast majority of American voters can be expected to understand what's going on. Look, I'm really trying here. I want to understand, but I don't think there's much hope for me.
The economy is just too damn complex. For instance, I was listening to This American Life on the NPR podcast the other day (JP outs himself as a closet hipster), and I learned that apparently you can buy and sell stocks that don't exist, and that's totally legal (short selling). It's only illegal if you fail to deliver your hypothetical stocks to the buyer that you've never met (naked short selling). And that's just one of the bizarre little tidbits of finance that seem batshit insane to me.
As I understand it, economies must expand and contract. They can't just grow and grow forever. I also learned once that there are now safeguards in the stock markets to prevent a catastrophic collapse like the one that happened in 1929. It seems to me that the economy may take a downturn for awhile, but there doesn't seem to be a reason for this particular downturn to be the harbinger of the downfall of Western civilization. I truly don't understand how Merrill Lynch going out of business is going to shatter the economy. Why was our economy being balanced on the whims of a few CEOs in the first place then? Why would giving 700 billion dollars (under any conditions) to companies who fucked their shit up in the first place be a good idea? Isn't that like rewarding lousy work? Isn't that like giving a Masters Degree to someone who didn't do any of the reading for his classes?
Wait... never mind.
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The Stock Market - Much simpler when it was simply the place to buy your soup base.
5 comments:
Steven Colbert stole my "stock = soup base" joke tonight.
I should be making the millions of brain bucks off of my genius!
I'm thinking about making a post about it. I'll try to keep it to 500 words. :)
Frankly, no one is explaining it in terms that most people can understand. That's why most people are on the fence or opposed to it. There's also plenty of apocalyptic wording going on about the possible outcome of things. It all depends on your ideological point of view, too. Sigh. More later.
I have to finish these bastard essays and midterm grades. I'd rather be writing jokes for Colbert.
My economic treatise is scheduled to appear after 9 am tomorrow morning. It's definitely not 500 words. :(
The best and most logical explanation for the clusterfuck of an economy we have is best explained by this open letter by Ron Paul, how can't you love a man that signs his name with In Liberty,
Dear Friends:
The financial meltdown the economists of the Austrian School predicted has arrived.
We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.
Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I'd only be repeating what I've been saying over and over - not just for the past several days, but for years and even decades.
Still, at least a few observations are necessary.
The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?
We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.
Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).
Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."
Doesn't that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn't that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn't the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?
Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.
It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.
The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.
F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:
Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.
To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.
The only thing we learn from history, I am afraid, is that we do not learn from history.
The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?
Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.
The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.
I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects - the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.
H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.
In liberty,
Ron Paul
I agree with Ron Paul on much of that (Mad Dog is probably having a spasm right now). But, while the Fed Reserve created the means, there were plenty of people who stepped in and took advantage of it. Low interest rates in and of themselves aren't a bad thing. Lending to people you know have a high risk of not paying you back and then selling (or buying) their debt over and over again hoping that they'll pay and you'll get a windfall is a bad thing. The Fed may have encouraged it, but the lenders aren't lily-white in this either.
The Treasury dude of 1929 had much the same solution as Ron Paul: "liquidate, liquidate, liquidate" and to let the "whole rotten mess" sort itself out that way. This government is saying "liquidate, save that one, liquidate, save this one" hoping the landing won't be so rough. I personally think they've scared the crap out of too many people for it to matter much. Besides, when you don't know who is going to go under and who is going to be picked to be saved, how do you know where to invest?
Some of it needs to crash. But if it all comes crashing down, it'll be beyond painful. I'm not convinced this particular bailout will help the US brace for the landing it's going to take.
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