On the surface the numbers don’t look too bad regarding mortgage delinquencies, the unemployment rate, and similar statistics. So some people understandably oppose the proposed bailout. But underneath the surface there are enormous problems that may or may not be adequately addressed by the bailout. First, let’s take a look at how things look on the surface, and then examine what lies below.

The Economist discusses the bailout proposed by the Bush administration, and notes, despite all the Great Depression talk, the situation in the world of home ownership and mortgage payments is not at all bad — at least compared to the 1930′s:

Ben Bernanke…said “that our American economy’s arteries, our financial system, is clogged, and if we don’t act, the patient will surely suffer a heart attack, maybe next week, maybe in six months, but it will happen,” according to Charles Schumer, a Democratic senator from New York. Mr Schumer’s interpretation: failure to act would cause “a depression”…Both the crisis and the authorities’ response have been called the most sweeping since the Depression. Yet the differences from that era are more notable than the similarities to it.

From the stockmarket crash of 1929 to the federally declared bank holiday that marked its bottom, three and a half years elapsed, and unemployment reached 25%. This crisis has been under way for a little over a year and unemployment is just over 6%, lower even than in the wake of the last, mild recession. More than 4% of mortgages are now seriously delinquent, but the figure topped 40% in 1934.

The scale of the American authorities’ response reflects both the violence with which this crisis has spread, and the determination of the American authorities, most importantly Mr Bernanke, to learn from the mistakes that made the Depression so deep and long. In responding with such speed and vigour, they run several risks. One is that they overdo it…

While impaired mortgage securities are a problem, they are not, in our opinion, the most critical problem impelling the speed and size of the proposed legislation. The situation is a little more complicated than that. One issue is that, in the current environment, investment funds can knock off large US banks like dominos by employing a very simple trading and rumor-mongering strategy.

Of course who cares if one or another bank fails? That is no big deal in itself. What makes it a big deal is the $45 trillion or more in (thus far unregulated) credit default swaps that exist among the banks. If enough counterparties fail in this huge, inherently dangerous market, the entire system can cease to function. $45 trillion, after all, is a number that exceeds the GDP of the entire planet. Our current situation is, in its way, as serious as the one that confronted the US in 1930.

It’s too bad America’s current situation isn’t a novel, instead of, unfortunately, an episode in real life. If it were a financial thriller, the useful idiots would be the hedge fund managers who are just interested in making a buck by shorting stocks, manipulating spreads on CDS’s, and spreading rumors. The man behind the curtain would be an ideologue playing by an entirely different set of rules, bent on the destruction of the Western way of life, and empowered by a bank account suddenly swollen with cash from, say, the spike in the price of oil. He would think of himself as a genius, “a master in calculation and tabulation,” and his plan would be brilliant except for one fatal flaw (which is what, by the way?). But such a scenario isn’t possible in real life, is it?

This entry was posted on Friday, September 26th, 2008 at 3:19 am and is filed under Democrats, Religion, Republicans, War, business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.