You know those videos of the implosion of a building that is being torn down, when they play them in slow mo? Well that's what I feel like I'm watching in economic news lately.
I read this in the NY Times today, after Bear Stearns needs to be propped up by the Fed: "there’s only so much the Fed — whose resources are limited, and whose mandate doesn’t extend to rescuing the whole financial system — can do when faced with what looks increasingly like one of history’s great financial crises."
Yikes, one of history's greatest financial crises? Yikes.
Apparently what happened yesterday and today was a modern version of a bank run. But these days, you don't see farmers and small businessmen lined up outside a local bank in a midwestern city, trying to get their cash out. It happens in virtual space, where no one can see the lines forming and the angry mob gathering.
So, if I understand this article correctly, what's happening now is that much of the bad debt of all the messed up mortgages on property that was appraised and sold far above its real-world value is now being taken on by the Federal Reserve Bank (in other words by the full faith and credit of the US government). The people who sold property which was inflated far beyond any realistic price have their money. The people who bought it will walk away. And who will be holding that empty bag?? Hmmm, that looks like us.
The argument for free-market, anti-regulation, pro-business policies looks like it's circled around, right back to 1929. Except that in 1929, the government wasn't also simultaneously throwing money into a black hole overseas and calling it the Global War on Terror.
It strikes me that we've tried to run an economy on the cheap, on borrowing and debt and buying cheap stuff from overseas. A strong economy is built on things like educating more people (see GI Bill)and building infrastructure here at home that will last (see things like rural electrification, the interstate highway system, and all the bridges and schools and public works built in the post-war period, which we are now watching crumble to the ground while we blow things up overseas.) An educated population and a functioning infrastructure will lead to slow but steady increases in real productivity. Money borrowed against the equity in your home to finance a big screen tv manufactured in Asia will lead to....well, let's see where it leads.