Thursday, October 02, 2008

What's It All About, Alfie?

Since I seem to have an opinion on everything, I've been asked by several people, in person and by email, for my take on the current economic mess and the proposed Wall Street bailout. The truth is, like John McCain, I don't know much about economics (after all, I was an English major).

So although I've read quite a bit about the current situation, I don't feel sufficiently competent to express an opinion. And unfortunately, although the Bushies have been promoting the crisis as being on the verge of the 2nd great depression, the credibility afforded the Administration is zilch. It's a sad thing to say, but I wouldn't believe a word that the Administration says about pretty much anything. Will Bunch of Attytood said it best last week, in There's a wolf in the woods...maybe:

It seems to me that folks are dancing around the biggest problem that Americans are having with this $700 billion, or whatever, bailout package. It's not just that there's too much for Wall Street and not enough for Main Street, or that America can't really afford it, or the messy presidential politics, though there is all of those things. The real problem is that nobody trusts or even believes the current president of the United States. And that makes it hard to solve a real problem that comes along.

This is why lying matters so much. And so maybe somebody thought they were lying for the greater Straussian geopolitical good when they created falsehoods about Saddam and al-Qaeda, or didn't think it was doing much harm then they lied about who was blabbing about an undercover CIA agent or why they were firing U.S. Attorneys or many other things too tiresome or painful to rehash after 7 1/2 years. But after all of that, who knows what to believe anymore?
On the other hand, I've expressed before that the financial condition of the country is worrisome. Those economists and others that I read (and trust) have expressed serious concern for some time. For example, Paul Krugman of the NYTimes, has been predicting that the housing bubble was about to burst for some time, That Hissing Sound, even though the Republicans dismissed his concerns with the market as the rantings of a liberal lunatic. See Bubble memories.

As I understand it, the problems we are now facing have been exacerbated by the changes to the Bankruptcy law that the credit card industry pushed through several years ago. After the revisions to the Bankruptcy law in 2005, it is exceedingly difficult to get credit card debt discharged in bankruptcy. See The Debt-Peonage Society. As a Bloomberg piece explains, Bankruptcy Law Backfires as Foreclosures Offset Gains:
Washington Mutual Inc. got what it wanted in 2005: A revised bankruptcy code that no longer lets people walk away from credit card bills.

The largest U.S. savings and loan didn't count on a housing recession. The new bankruptcy laws are helping drive foreclosures to a record as homeowners default on mortgages and struggle to pay credit card debts that might have been wiped out under the old code, said Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank.

``Be careful what you wish for,'' Westbrook said. ``They wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures.''
Foreclosures have become the accepted way to manage the subprime mortgage crisis, in part because the law also removed the ability of the bankruptcy court to readjust the amount of the mortgage. Questions About The Mother of All Bailouts. Therefore, when a consumer faces the cash crunch with the mortgage payments increasing and the value of the home decreasing, there is no point filing for bankruptcy to try to get relief. In other words, if the consumer has to choose between paying the mortgage or the credit card bills, the credit card gets paid, since that debt won't be forgiven in bankruptcy and the court has no discretion to re-write the terms of the mortgage.

And then, of course, there's the old fashioned greed and excess of Wall Street that has brought us to the brink of disaster. Ultimately, I tend to share the pessimistic view of Shaun Mullen, as he so eloquently expressed it in Humpty Dumpty Does A Star Turn:
As I and other folks who weren't born yesterday have already written, there is a very different feeling to this economic crisis.

Perhaps the last eight years of deregulation, rampant greed and an epidemic of book cooking has diminished my faith in our financial institutions to such a point that I can't see straight. But what is happening on Wall Street and happened yesterday in Congress in the single most profound smackdown of a sitting president in memory just doesn't have the feel of the 1987 crash, the dot-com bubble kaboom or the post-9/11 plop.

In each of those instances it felt like the ship would right itself, and it did. But this time I get the feeling that things won't ever be quite the same again and whatever adjustment occurs will be as inadequate as Washington's flailing efforts to plug the gaping holes in the ship's hull while not even beginning to deal with the underlying causes.
So Alfie, it's Humpty Dumpty time.

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