Some think we should just trust the free market to correct itself--that sound companies will survive and bad ones will be "cleansed." The theory goes that companies that have planned wisely can ride out a few months of lesser access to credit, and that those that have been overextended should, rightly, fail.
Others would prefer we invest the $700 Billion in a great Public Works project to improve our nation's infrastructure and create the basis for a new economic boom (in say, renewable energy technology). Of course, having something to show for the investment would be better than the pile of bad debt we look to be holding if the "bailout" passes.
Unfortunately, I'm increasingly convinced that the ship has sailed on those options. They both simply overlook too many key issues in a global economy that I don't fully understand. The below is clearly over-simple, but I don't think wholly wrong. If any of you have tried to understand what's happening and glazed over sometime shortly after hearing or reading that "as LIBOR rates began to climb, credit markets began to freeze," I hope the below provides a capsule view of what is happening and will happen without intervention.
First, "credit markets" being frozen, isn't just about long-term lending for future capital projects, innovation, or even consumer purchases. In fact, as I understand it, it is only very loosely about those things. The credit markets are the lifeblood of global corporations. Every day, billions and billions of dollars are lent and repaid on a very short-term cycle (like 24-hours or a week). The (LIBOR) rates are generally fairly reasonable, but on large sums of money produce a nice profit for the lenders, and the comparably cheap price of the money makes it a good way to ensure cash flow for companies that have large accounts receivable-they pay today's bills, from leases, payroll, supplies etc... with the receipts they expect tomorrow (generally for goods and services already delivered and so a reasonably good bet). When the cost to borrow this money rises sharply, it becomes harder to borrow against tomorrow, and as the market contracts, it also becomes less likely that those who owe YOU money will repay it in full.
Given the interconnectedness of markets today, the housing bubble issue that we've heard is at the root of all this mess is related, but it is hard to pin down what is the chicken and what is the egg. Large investment banks were clearly heavily invested in "bundled" mortgages and as those have defaulted they've been less willing/able to lend, or only at higher rates, and the lifeblood that keeps the global economy moving is clogging up--some mortgages default, so investment firms lend less at higher rates, which makes it harder and more expensive for firms otherwise unassociated with the mortgage industry to meet expenses, including basic supply chain items and payroll, which leads to hiring freezes and fewer big purchases and investments first, then layoffs and plant closures, a declining tax base, increased cost of goods and services that are harder to afford by a public impacted by higher rates of unemployment and inflation, more people default on their mortgages and on and on.
I've heard a lot of people touting the "well I made good choices" or "my company only invested in THINGS" so they'll be ok, or they can ride out a few bad months. The problem is that the above scenario very quickly spirals into something that gets a whole lot worse for a lot of months before there is any hope of getting better, and it won't just be the "bad guys" that are impacted early or hardest. In an economy as globally interconnected as ours this will have global effects, not just national ones.
Sure, a public works project is more palatable--I'd much rather have my money invested in an enduring benefit than the "bad investments" the Treasury will be buying up--but sadly, if we've under-regulated the financial industry, we've probably over-regulated government contracting. A major Public Works project would take years to even get started and would not inject liquidity into the markets at all in the short term. If we'd started such a project 10 years ago we might now be reaping the benefits, and if Obama is elected I hope that we will still begin such an undertaking, but if some sort of rescue package doesn't pass it is a good bet that even if it bolsters Obama's chances of getting elected, it will profoundly undermine his ability to accomplish many of the things we care about.
Don't kid yourself. This is bad. The roughly 10% plunge that the stock market took today was based on a reasonable assumption that this thing will still pass, relatively soon. If it becomes clear that there will be no rescue, expect the market to lose closer to 50%. If that happens it will not just affect people who made bad choices, it will affect all of us, and our children. It will most certainly affect our parents who expect to draw on their retirement funds sooner than later and will not have the benefit of 30 years recovery in the markets. In a contracting economy, it is often the most senior employees, who get the biggest paychecks, that get laid off. If millions of late fifty or early sixty somethings lose their jobs a few years shy of retirement we'll both see a booming burden on their children who won't let them live in the poorhouse, and a faster than planned for crunch on social security.
If this isn't a happy enough scenario, all of the research that I have done on globalization and poverty tells me that as world markets start to collapse, there will be a swift and steady rise in violence and political instability around the world, and that while it may not start in the U.S., we won't be immune, and that many, many people who see their livelihoods go up in smoke globally will hold the U.S. culpable, and will distinguish little between Main and Wall Street. In the 1930s Wall St. was much more removed from the economies of Riyadh and Islamabad than today.
People are justifiably pissed. I am too. We have no good reason to trust the current administration. I agree wholeheartedly that any plan that is passed must have safeguards and accountability. In an email I received from my Congressman, who voted "No" today, Mark Udall writes:
I've always said that any response to this economic crisis must adhere to four core principles: no blank checks for the mistakes of Wall Street and the Bush Administration; a real crackdown on excessive executive compensation; help for small businesses and Main Street America; and strong taxpayer protections.
Unfortunately, while today's bailout proposal came closer to satisfying these principles than the blank check originally sought by the administration, it remains an incomplete response.
This bill does nothing to begin the fundamental reform that is needed to fix the broken financial system that led us to this crisis. Washington is painfully slow to make fundamental reforms except in times of extreme duress and real public outrage, so we must make sure this opportunity leads to real reforms to the laws governing our markets, financial institutions, and their regulation.
I cannot accept a solution that risks $700 billion to bail out the boat, but does nothing to patch up the hole.
Fine. I want a better bill too. But I don't want political posturing, or a "stick it to 'em" attitude.
Perhaps, just as too many trusted the "fundamentals" of the economy to sort themselves out, we've also been a bit too willing to trust in our political system to work itself out over time. This is not just about holding the fat cats accountable, though there will be more of that in the years ahead, it is also about recognizing the breadth and reach of the US economy around the world, and the financial and political catastrophe that will follow if we cross our arms and say "so there, take that." We may not be the first to feel the effects, but many people who were not part of the problem will lose everything. When that happens they will be angry, and grow desperate.
If we head down that path, you can forget about that public works project because we'll be tying up every dollar we have to try to staunch the bleeding fighting wars that can't be won.
That's not the future I want.
I wish we were in a different predicament. I wish we had leaders that hadn't lied and squandered our prosperity, but I'm not willing to risk further dooming our future to spite Bush or his cronies. It is time to stand up and take responsibility. Failure to pass real relief will be the ultimate gesture in cutting off our nose to spite our face. Worse, it will further demonstrate our disregard for the impact of our dominance on the rest of the world.
"Let them eat cake" has its consequences.
I want a great public works project, a burgeoning new economy, and leaders we can trust. I also want Obama to be able to actually accomplish at least some of his proposals. If the market tanks, I don't think any of those things will happen.
We have an opportunity in November to teach a lesson to those who got us into this mess. We can vote out everyone who has opposed the kinds of safeguards and fiscal reforms that might have averted this catastrophe. Right now, though, all of our representatives are running scared. They think they'll get voted out not for what they did yesterday, but for what they will do tomorrow (or Thursday...).
As Nate Silver points out:
This was predictable, I suppose, but it's remarkable to see how strong a relationship there is between today's failed vote on the bailout and the competitive nature of different House races.
Among 38 incumbent congressmen in races rated as "toss-up" or "lean" bySwing State Project, just 8 voted for the bailout as opposed to 30 against: a batting average of .211.
By comparison, the vote among congressmen who don't have as much to worry about was essentially even: 197 for, 198 against.
I hope tomorrow you'll join me in calling our representatives and telling them to work their butts off to find something they can vote FOR. The American people may not like it, but we are not wholly blameless in this mess. It is time to be responsible and clean it up. Tell your representatives that your vote in November will be decided by the track record they already have, and that you expect them to pass a bill, with appropriate safeguards, and pass it soon.
Ultimately, voting against some financial rescue will be like standing around railing at the city government for cutting first responder funding while the town burns instead of forming a chain gang to save it.
We can, and should, vote the suckers out who created this mess. We should also show them what true leadership looks like by making sure it gets fixed.
Let's leave Obama a little something to work with.
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