Economy in Meltdown?

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When Paul Krugman begins a column this way, it does get your attention:

Will the U.S. financial system collapse today, or maybe over the next few days? I don’t think so — but I’m nowhere near certain. You see, Lehman Brothers, a major investment bank, is apparently about to go under. And nobody knows what will happen next.

People with online brokerage accounts probably put their sell orders in last night. This will not be a happy day at the New York Stock Exchange.

At the Agonist, there’s a discussion among some of the smartest people in the blogosphere about what’s happening with financial institutions. I recommend it. The consensus is that we’re unlikely to see a massive 1929-style stock market crash, followed by the second Great Depression. We are more likely to experience a series of dips and recoveries over the next few years, but overall the market will be drifting down, not up.

In any event, Treasury Secretary Henry Paulson and the feds are shoving everything they’ve got under the markets to keep them propped up until after the November elections.

Expect all candidates to be spitting out the word “change” at machine-gun pace today. McCain and Palin will continue to talk about “cleaning up” Washington and, thereby, Wall Street. However, when McCain and Palin talk about “change” and “reform,” they are talking about cleaning up corruption, not changing the system. As I understand it, today’s crisis wasn’t caused primarily by corruption, in the sense of doing something illegal for personal gain. It was caused by the system.

The McCain-Palin campaign (or should that be Palin-McCain?) also opposes the very kind of “propping up” that the feds are doing. They’ve been calling the government takeover of Fannie Mae and Freddie Mac “spending the cookie jar.” The takeover is likely to cost the Treasury $100 billion to $300 billion. $300 billion is roughly equal to three years in Iraq War dollars.

Yes, this is seriously bad, but McCain-Palin are focusing on symptoms, not the disease. They continue to pledge allegiance to deregulation and Reaganomics.

Andrew Leonard writes at Salon:

Over the last three decades Wall Street sought, and received, a climate of deregulation and minimal oversight that allowed it to create new markets at will, permitted investment banks and commercial banks to commingle their activities, and exempted critical new innovative financial products from any meaningful government restraint.

Now, we are staring at the kind of mess you get when you give two-year-olds a few buckets of paint and tell the baby-sitter to take the day off. Clean-up is going to be a bitch.

“Last three decades” = rise of Reaganomics. Thanks so much, Ronnie. Note that the rise of Reaganomics to some extent preceeded Saint Ronald’s ascension to the presidency. To some extent the right-wing “deregulation uber alles” ideology was also promoted by the Carter Administration. Some of the deregulation that Saint Ronald gets “credit” for actually began under Carter. But Reagan accelerated it, big time. There’s some historical background here (scroll down a bit).

Short-term, the challenge to the Obama campaign is to get people to understand that we face a systemic crisis more than a crises of corruption, and that Palin-McCain’s “change” message is not about the kind of change that’s needed. People need to hear, over and over, that Palin-McCain’s economic policy proposals are no different from what George W. Bush has been doing. Long-term, the sad fact is that, thanks to Reaganomics, there will be no money to do much of the good stuff Obama wants to do.

17 thoughts on “Economy in Meltdown?”

  2. I think it’s an important time to remind people that Shrub and McCain both want to replace Social Security with a plan where us regular shlubs put our retirement money into the hands of these guys, all in the name of giving us “ownership”.

    I realize McCain’s personal plan is to get that nice presidential pension, but he’d be happy to let the rest of us watch our retirement savings evaporate when the big, reliable, famous Wall-Street-name company holding it goes away.

    To borrow a phrase, thanks, but no thanks.

  3. Maybe repeating myself, but the repeal of the Glass-Steagel (sp?) Act in 1999, passed by Congress, signed by Clinton, probably Rubin’s baby removed any defense against speculation in the financial markets.

    The Act was put in place in 1933 after some thinking people, what are those? studied the Crash and Depression and determined that commercial banks and investment banks had to be separate entities. Repealing the Act in ’99 did away with Glass and cleared the way for speculation on a grand scale. We’re seeing the results now.

  5. Holy mother of God, I’ve only just barely recovered from the telecom crash of 2001/2002. I can’t survive another one of these.

    And McCain’s poll numbers keep rising. I don’t want to believe that Americans are dumb as dirt, I truly don’t, but the damned soil test results keep coming back positive.

  6. The good news is that Obama is on the right side of this crisis, and McCain can easily be shown to be just another pitch-man in a long stream of front guys for conservativisms’ failed policies. I saw a speech (sorry no link) Obama gave a few months ago that tied these market failures directly to conservativism, and so hopefully we’ll see more of this.

    A little bit of history: Yes, there was a big crash in 1929, but the stock market didn’t hit bottom until 3 or 4 years later. It got there, not in straight arrow fashion, but through a series of declines, punctuated by sucker rallies. Markets rarely move in one direction only.

    Here in CA, realtors are seeing home buyers filtering back into the market, even though prices still have a ways to go to get to “normal”. Another sucker rally.

    Agree with the braintrust over at the Agonist: We are more likely to experience a series of dips and recoveries over the next few years, but overall the market will be drifting down, not up.

  7. I always learn so much at this blog! Felicity’s comment intrigued me, as I’d never heard of Glass-Steagall before. It was repealed as part of the Gramm-Leach-Bliley Act of 1999.

    I don’t know that we can blame Robert Rubin for the 1999 bill; Phil (“a nation of whiners”) Gramm introduced it in the Senate, and Jim Leach (R-IA, now an Obama supporter) introduced it in the House. Bill Clinton signed it into law. In a very tiny nutshell, a portion of the bill ended restrictions on the kinds of investment activities commercial banks could get into.

    And, from Wikipedia:

    Senator Phil Gramm led the Senate Banking Committee which sponsored the Act; he later joined UBS Warburg, at the time the investment banking arm of the largest Swiss bank.

    My thought, now, is How do we clean up this mess? What is Obama saying? Who are the economists in his corner, compared to McCain’s? (I know what McCain is saying, essentially: “Everything is fine. Return to your jobs and your TVs. Are the Olympics still on?”)

    Is there a wedge here for the Democrats? Or are we all just plain screwed?

  8. What meltdown? Our economy has never been so strong.. why,we’re investing 10 billion dollars a month in freedom alone. When our Iraqi dividend kicks in and starts paying a hansome return, all you whiney liberals will be singing a different tune. We’re just going through a minor financial adjustment..that’s all..ask Bush, if you don’t believe me

  9. Swami… you do realize you’ve now confused any newbie lurkers all to hell. (Hee hee!)

    I heard something interesting on NPR on the short drive home. This weekend, Henry Paulson sat in hour after hour of meetings, while various parties pleaded and eventually flat-out begged Treasury to step in and save Lehman Bros– the same way they’d saved Fannie & Freddie, and Bear Stearns– and he just folded his arms, hour after hour, and said, “No.” Paulson offered no explanation of this inconsistency (which might have been easy enough to do; I can’t say), after which an institution that had survived the Civil War and the Great Depression succumbed to Stage IV terminal Reaganomics.

    Jeez… if he never intended to say yes, why didn’t he just go golfing?

    I also learned from NPR that Lehman Bros functioned as an “insurer” of sorts for the investments of other institutions, so it’s kind of like American Family suddenly going under in the middle of hail, wind & lightning season.

    On a personal note, if my 401k evaporates, there goes my escape route to Canada in the event Palin-McCain win.

  13. joanr16 asks very reasonably, if Paulson was just gonna sit there and say No, why did he go there in the first place?

    One hates to defend high finance *and* a Bush appointee at the same time, but maybe this makes sense in finance terms — and Paulson seems to have markings of competence that make you wonder how he sneaked into office. Anyway, a couple of possible reasons for being there:

    One, it would be reasonable to try to help the various interests to get to a good solution. He was in a position to offer advice and mediation, and actual support if a good arrangement was in the offing, even without unlimited taxpayer dollars. No go, but worth trying.

    Also, he probably had to be there precisely so he could keep saying NO with credibility. Any underling (or none at all, so they’d have to phone him up if they had a bright idea) wouldn’t carry enough weight, and they’d still go over the head to Paulson. Or, FSM forbid, to Bush! And in the process they’d have wasted time pursuing the idea, whereas Paulson could quash it on the spot.

    Maybe the gummint ought to have backed the bad securities to stave off a worse crisis. Krugman seems to think so, or at least take it seriously. I sure don’t know. But the question has to come up, where do you stop? It’s possible Paulson was right in his choice.

    BTW give him and Bernanke credit for one thing: They really, truly did not want to bail out the owners of these companies, who by all capitalist logic are supposed to take the loss when their enterprise runs itself into the ground. I mean capitalist logic, not crony capitalist shit that the Bush administration, and fortune, is based on. And it’s a good principle if you’re going to have capitalism at all.

    Not taking a stand on that last “if”.

  14. BTW again, about Glass-Steagall. Clinton and his party certainly deserve some blame on the repeal, but it shouldn’t be overstated.

    If we say this started “before Bush II”, and that means the Clinton administration, we’re assigning blame badly. The campaign to kill Glass-Steagall started under Bush I. Or before, but I don’t think it amounted to anything that early. Definitely the bankers were working to kill that inconvenient law for years, and maybe there’s something positive in the fact that it took as long as it did.

  16. Porlock, some good explanations on Paulson. I liked the comment that he seems to have enough competence to be a Bush Cabinet misfit.

    I’m having a crash-course (ouch; sorry) in economics this week. From what I gather, we’re reaping the whirlwind that was sown as far back as the second Reagan term. Probably, any other president but Dubya would have seen the warning signs of a meltdown 18 months ago. Looks to me like there isn’t much they can do now that will please anyone. Acts of desperation rarely do.

  17. I watched Krugman last night on MSNBC, talking about “socialized risk” and I think THAT is the root problem in a nutshell. The mind-set is, free the market to make just as much money as we can, any way we can, with no restrictions (and low to no taxes, please); no regulation required because if we get in trouble, Uncle will be there to prop us up. Win-win, and let the middle class bear the financial burden.

    Damn. If I could get a deal like that… but then, I’m middle class.

    I’ve been thinking for a long while that one of these guys really ought to crash and burn to make the point. Maybe Paulson’s been thinking the same way. I mean, this is going to hurt BAD in the short term, but if we keep bailing the children out, they won’t learn from their mistakes.

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