Economic Meltdown

It's funny, but people seem to like to work in hyperbole. This is apparent in any discussion about dictatorships (Pinoche suddenly becomes Hitler, Castro becomes Stalin), but it's also present in the sciences. Particularly those of the "social" variety.

The best example right now is in the discussion of the financial crisis. To hear politicians, both Democrats and Republicans, speak of this, it would seem that we are heading for a second Great Depression. In fact, that is essentially what has been said. Ben Bernanke, Paulson, and the rest of the government's economists have not only failed to diffuse this notion, they have (as best I can tell) aided in its diffusion.

This is a ridiculous idea. The "fail-safe" mechanism of the American (and world) economy - the Federal Reserve and Treasury - is still intact. Individual banks may fail, but the government can always issue more money. That will come at great cost, but at a much lesser one than either the "natural" result or the plan that so recently failed in Congress. And, really, we're looking at a fairly large but not massive loss of capital investment - a trillion dollars in a sea of some forty trillion. At the end of the financial day, the market will - somehow - reach equilibrium. If anything, we might just see a revitalization of American jobs as the dollar falls and foreign capital flows into the American system.

I think the main failure here has been in the American political system. Both sides have attempted to blame the other: Democrats blaming some vague failure of the "Bush economic policy," while Republicans conjuring up the "liberal government" bogeyman.

The Republicans are clearly engaging in little more than flinging bullshit, but the Democrats appear to be articulating a real critique. The problem is that the Democratic economic platform is not significantly different from that of the Republicans. The Bush Republicans, in fact, are advocating the exact same policy that the Democrats are supporting (albeit with a great deal of wailing and finger pointing). Both want a massive government bailout. The Democrats are just complaining about it more.

Really, what could have been done about the housing bubble? What would the Democrats have done differently in 2002 or 2003 to slow the boom? Their current critique stems from some abstract idea of a failure of the regulatory system - specifically the repeal of the Glass-Steagall act - but this idea is clearly a no-go.

Even if the Democrats want to say that the mortgage industry should have been more regulated, what could have been done? Would they have repealed the subsidy on mortgages? Would they have ordered the SEC or Fed to examine every mortgage issued? No, they would not have. Neither party wants to do anything different on this point. In fact, I think that if the Democrats had been in control in 2002, they would have simply taken credit for the boom, just as the Republicans did, and then pointed their fingers at the opposing party today - just as the Republicans are doing now.

And both sides do seem to be in consensus - banks should not be rewarded for their failures. But this desire for punishment seems to be related entirely to CEO and executive pay. This is absolute horseshit - a base appeal to populism that does absolutely fucking nothing. Yes, these men and women created this crisis. But so did home buyers, investors, and Congress. And demanding cuts to CEO pay is a laughable punishment. What would be an adequate punishment? Don't bail them out. Let there be natural consequences. Let the banks declare bankruptcy and be reorganized and bought by other, larger, better run banks. Let the market take its course.

Yeah, people will lose money. And nobody will like the results, mid-correction. But that's life. And the result will probably be better.