Economy in Meltdown

This morning on TV, this guy looked really nervous.

Since he's the Secretary of the Treasury, that's not a good thing.

I know a lot about like two things. And since I don't know what either of those things are, imagine my distress at trying to figure out what the hell's going on with the economic meltdown my country currently finds itself in.

Big brokerage houses are getting bailed out (Bear Stearns), others are dying outright (Lehmann Brothers), quasi-private/quasi-public mortgage-lending institutions (Freddie Mae and Freddie Mac) and insurance giants (AIG) are being taken over by the federal government. If that weren't frightening enough, most of this happened in one week.

On Thursday/Friday, a massive, federally-backed bailout package was introduced by Treasury Secretary Paulson that, if enacted, will make the US taxpayer responsible for all of that bad mortgage debt that's in the process of sinking the world economy. It will also, as we're learning, require $700 billion to implement. That's $700 billion in addition to the billions we already sunk into taking over AIG and the two Macs. And now they're talking about buying the bad mortgage debt from foreign banks. I guess the Treasury's going to hold off on printing any more singles for a while. Got to crank them hundreds out.

Leaving aside for a moment where all of this money is coming from, particularly as we're laying out $10 billion a month for the Iraq occupation, will this new plan (which sent the markets way up on Friday) actually work? Among others, prize-winning economist and New York Times columnist Paul Krugman is dubious:

The Treasury plan ... looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

I hope I’m wrong about this. But let me say it again: Treasury needs to explain why this is supposed to work — not try to panic Congress into giving it a blank check. Otherwise, no deal.

So not everyone's sold on the new plan. But if it doesn't work, then what? Before the plan was announced, one government official in a position to know told a reporter the US financial system was days away from collapse. What if the rest of the plan's details, when announced, make the markets anxious again? In other words, what if they don't buy it? In this climate, anxious markets mean more massive bank failures. Would the world markets respond as positively to a 2nd massive bailout plan after the first failed? Doesn't it seem like this plan, hastily conceived as it is, is our only shot to stave off a decade(s)-long economic disaster?

There are some early and troubling signs this may be the case.

Senator Chris Dodd and Minority Leader John Boehner appeared together this morning on George Stephanoplous's "This Week", (along with the nervous-seeming Paulson) and appeared in total agreement on Paulson's $700 billion bailout plan. Stephanopolous pressed them on their uncharacteristic unanimity, asking what they'd each been told that could possible inspire two people so inclined to disagree to agree so completely. They wouldn't say, but they both strongly implied their motivation to make common cause was terror of the alternative.

So worst-case scenario is this plan doesn't work. It's probably too early to get too deeply invested in that scenario. If you want a reminder of what that looks like, read "Grapes of Wrath" or watch "Cinderella Man."

But what does it mean if this plan does work? Will it be a fair plan? A Wall Street type wrote this to the blog "Talking Points Memo" :

"As a Wall Street guy I am sort of glad that this bailout is being organized. However, what seems unfair to me is that there are absolutely no provisions for homeowners. Moreover, this morning on Stephanopulous I saw Hank Paulson talking about homeowners taking out mortgages that were higher than they could afford and about them needing to live up to their obligations.

I find it incredible that he would use language like that while asking taxpayers to send a trillion dollars to Wall Street because investment banks made irresponsible investments and aren't able to live up to their obligations."

No provisions for homeowners? That seems a bit myopic, doesn't it? After all, isn't the purchasing power of the American consumer (ie "homeowners") the fuel that runs the US economy? If our financial institutions come out okay, but homeowners are left high and dry, how's the engine going to run without that US consumer fuel? The ups and downs of the stock market usually don't break through the white noise of the typical news cycle for me, but the sense of panic in the air these days is hard to miss.

It seems like you need at least a B.A. in Economics to truly understand the forces at play here, so for uneducated laymen like myself, I'm forced to rely exclusively on the commentary and opinion of those who do understand what's happening to draw my own conclusions. The fact that all of those people seem kind of terrified, does not lessen my growing feeling of dread.