Wallstreet, meet mainstreet...

I was glancing through the updates to a blog I read, and I came across a video that brings up a very important point. (Kudos to Taki's Magazine.)





The video is, I would say, in line with the title of this blog, in that it lambastes both Democrats and Republicans for their respective decisions to pass the bailout bill, and praises more extreme viewpoints, both on the far-left and the far-right. I have respect for both Dennis Kucinich and Ron Paul as men of principle, and I completely agree that it is disgusting that the addition of pork-barrel spending made the marginal difference in getting the bill passed. However, I think the reprecussions of extending this financial crisis for even longer could conceivably be worse than taking no action at all. Credit markets have contracted severely, at least according to the experts. Banks are far less willing to extend overnight loans to each other, and institutions like Lehman brothers are shutting their doors because they cannot raise capital fast enough to cover the collateral on their subprime-backed security obligations. (I'll look at the FED's website when I have time and pull up some graphs to see for myself.)


While corporations ought to fail, and indeed, must do so in a healthy capitalist economy, when the situation begins to snowball like this, when companies go bankrupt left and right simply from being unable to collateralize their increasingly risky/worthless debts, when the LIBOR fluctuates as it has simply due to fear... That is a much different, and much more frightening, scenario.


It is tempting to make comparisons the Great Depression, not because of the severity of the current situation, but because of the nation's seeming inability to repair itself, both then and now. The Great Depression was unique, in that for much of it, the FED was acting in precisely the wrong manner, making money more expensive to curb speculation rather than reducing the interest rate. Bernanke is handling this in the proper manner, flooding the markets with liquidity, yet the question remains: is there a way out of this? Enter Kucinich and Paul: Why, exactly, should the government do anything at all?, they ask. Shouldn't greedy corporate America be made to suffer for its sins?. The answer to that is an unambiguous yes, provided that the nation's financial system remains intact. In case you're wondering, this has not been the case. Institutions that were too-big-to-fail are failing left and right, and this degenerative process is trickling into every citizen's life whether he realizes it or not.


In his book An Uncertain World, then Secretary of the Treasury Robert Rubin details the tough choice he had to make during the Mexican financial meltdown. The American government gave a huge loan to Mexico to stave off the run on the peso, not because it was popular (it was not), nor because the government would necessarily make money off the deal. Indeed, Rubin stresses that at no point in the decision-making process was he sure of the outcome. He, and other important men, opted to take the risk because the potential gains from a saved Mexican financial system outweighed the certain catastrophe that a Mexican crisis would have on everyday Americans. Bernanke and Paulson don't know that these dramatic market interventions will solve the problem. They do know, however, that the consequences of a collapsing financial system far outweigh the risk that their loan will not pay off.


(I should say, as a postscript, that this crisis is not anything near the Great Depression. In size, scope, and duration, thus far, we should be happy we don't live in the 30s.)