Tuesday, September 30, 2008

Financial follies and fluctuations

Working on campaigns encourages me to feel as if I were in control of my life. Watching the bailout go down in Congress and the stock market gyrate (Dow up 485 today -- huh?), reminds me that I'm really just flotsam in a storm, a cork bobbing in vast seas, hoping I don't get thrown up on a rocky shore. This is possibly a realistic reminder that I am not in control, that I am dependent on community and chance. But that doesn't mean I like it.

So I've read a lot of articles about the financial system -- and I am not going to pretend I understand all this. If you want a good collection of points of view, this might be a good starting point.

In my opinion, Dean Baker, co-director of the Center for Economic and Policy Research, offered one of the clearest explanations and prescriptions:

The main cause of the economy's weakness is not insolvent banks and lack of credit; it's the loss of $4 trillion to $5 trillion in housing equity as a result of the bubble's partial deflation. Families used their equity to support their consumption in the years from 2002 to 2007, as the savings rate fell to almost zero.

With much of this equity now eliminated by the collapse of the bubble, many families can no longer sustain their levels of consumption. The main reason that banks won't lend to these families is that they no longer have home equity to serve as collateral. It wouldn't matter how much money the banks had, they are not going to make mortgage loans to people who have no equity.

And house prices are not going to come back. This is like Pets.com. We are not going to get the price of $200,000 homes in central California back up to $500,000.

The main problem in recovering from the recession will be finding ways to boost demand other than household consumption. In the longer run, this will mean reducing imports and increasing exports. In the short-run, we will have to rely on government stimulus to help spur growth and reduce unemployment. The Democratic demands for stimulus were not extraneous to the legitimate goal of a bank bailout bill. Fiscal stimulus must be central to any serious effort to boost the economy.

He wants the U.S. government to put money directly into banks so they start loaning -- and get what private enterprise would get for its cash: partial ownership of the banks.

Probably too simple for Congress to achieve.

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