Is there a point of no return?
At the moment, there seems to be a real head-in-the-sand attitude spreading rapidly on the both the left and the right, a deep skepticism that our economic situation is really as bad as Bernanke and Paulson are claiming. That's a natural impulse given how often the Bush administration has tried to gin up fake "crises" in order to get legislation they want passed. But as someone who openly cried foul during each one of these prior fake crises, I plead with you to take this one more seriously.
Our financial system, especially in its current state, is highly vulnerable to a wide scale loss in confidence, which we were getting perilously close to at this time last week (before the idea of a massive bailout was first floated). If that panic sets in again (and it will if the bailout proposal is killed), it will very likely lead to a cascade effect that will badly damage every sector of the economy. Banks will fail by the hundreds. Credit will dry up. It will be a disaster.
Pretending that this is all a made up concern is not helpful. I realize that the Bush administration has no remaining credibility, but that doesn't mean there is no crisis. The real question we should be asking right now is this: is there a point of no return? Is there a point at which the cascading effect of the credit crunch would gain too much momentum to be halted by a bailout of the kind currently being contemplated?
I'm not an economist so I don't know the answer to that question. But it's a crucial one. If the answer is that the situation could quickly escalate out of our control, then we really need to bear down and pass something this week. But if experts think that confidence in the credit market could be restored, even late in the game, by buying up these bad assets, then perhaps it is worth waiting a little bit and seeing how bad things actually get. If the doomsayers are wrong, then the economy will keep chugging along and the taxpayers will be saved a lot of money. If the doomsayers are right (and, unfortunately, I strongly suspect they are), it should become apparent to everyone fair quickly that doing nothing is not a viable option, and at that point, Congress should have the political support it needs to get behind some kind of bailout.
Our financial system, especially in its current state, is highly vulnerable to a wide scale loss in confidence, which we were getting perilously close to at this time last week (before the idea of a massive bailout was first floated). If that panic sets in again (and it will if the bailout proposal is killed), it will very likely lead to a cascade effect that will badly damage every sector of the economy. Banks will fail by the hundreds. Credit will dry up. It will be a disaster.
Pretending that this is all a made up concern is not helpful. I realize that the Bush administration has no remaining credibility, but that doesn't mean there is no crisis. The real question we should be asking right now is this: is there a point of no return? Is there a point at which the cascading effect of the credit crunch would gain too much momentum to be halted by a bailout of the kind currently being contemplated?
I'm not an economist so I don't know the answer to that question. But it's a crucial one. If the answer is that the situation could quickly escalate out of our control, then we really need to bear down and pass something this week. But if experts think that confidence in the credit market could be restored, even late in the game, by buying up these bad assets, then perhaps it is worth waiting a little bit and seeing how bad things actually get. If the doomsayers are wrong, then the economy will keep chugging along and the taxpayers will be saved a lot of money. If the doomsayers are right (and, unfortunately, I strongly suspect they are), it should become apparent to everyone fair quickly that doing nothing is not a viable option, and at that point, Congress should have the political support it needs to get behind some kind of bailout.
posted by A.L. at 1:33 PM
8 Comments:
I agree one hundred percent. This crisis is the real thing, as the Kunstlers of the world have been warning about for years. My biggest fear is that nothing we do will stop the carnage. Its a catch 22. If we have a trillion dollar bailout, the dollar becomes a world wide joke and foreigners stop loaning us money.
I hope its not true, but i fear we are screwed either way.
The crisis is real, I agree. And will explode onto "Main Street" if not mitigated on Wall Street.
McCain just made a big announcement - see CNN - suspending campaign to go to Washington to work on crisis, asked Obama to join him. Doubtless you will have a post about this. It is a shrewd move politically, and Obama must respond quickly but carefully. How?
It seems that Obama reached out first, but McCain is stealing the headlines... Obama needs to get on message NOW about this.
http://www.huffingtonpost.com/2008/09/24/mccain-asks-to-postpone-f_n_128968.html
http://www.talkingpointsmemo.com/
My guess is that McCain's handlers, while prepping him for the debate, discovered that he couldn't wield the economic material in any kind of meaningful way.
Whether Obama continues to campaign or not, he should demand McCain honor the debate schedule.
What did I say just this morning? DOA, DOA!
"GOP sources say they believe the current deal is dead on the Hill and reject suggestions that without McCain's vote Democrats would not support a package."
--MSNBC
Of course the bill is dead, and of course they're lying about McCain's vote and the Democratic support.
Everyone hates this bailout, as I said it's totally unpalatable in any political sense.
Now McCain has panicked, but how is that supposed to translated into a vote for it? He still can't.
McCain is trapped, as we all are.
Hello? We...are...fucked. Our leadership is crippled, pleading in blog screens won't change it, I'm sorry, Al,
Wait for the carnage. A bailout cannot be pulled out of DC right, it won't work.
68% of 35000+ polled on CNN believe the McCain move is a political gimmick. Everybody understands it's a stunt. I've seen lots of people calling for Obama to really skewer McCain on this... but how best to do that?
AL -
Glenn Greenwald has an interesting interview with an ND finance prof up his blog. The short version is: yeah, we got serious problems but the roof isn't gonna fall in on Monday, most likely. Get a sensible deal, there's probably time to do it.
I like your work, AL, but I'm going on visceral impulse right now: in this game of chicken, I'd rather throw the wheel out the window than give unreviewable access trillions of dollars to Paulson and Bernanke.
If there really is a crisis, they'd be falling over themselves to get the cash, even if it meant stringent oversight.
Sorry...don't believe'em.
I'm sorry AL but after all the U of Chicago bullshit they've been pedaling - remember all those great new jobs we'd get after outsourcing work to the third world? Yeah we're still waiting on those.
Yes, nearly every finance and econ guy in the country (including billmon and krugman) is running around chanting "the roof, the roof, the roof is on fire"
But all of these people have lived in the finance world for their entire lives, they no doubt see it as the biggest catastropy ever in the history of everything. I have my doubts.
but even if they're right, I really can't resist yelling back "burn motherfracker burn"
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