Saturday, October 04, 2008

The Sorceror's Apprentice

I've concluded this is the appropriate metaphor for the mess the economy is in. The financial geniuses who have been running things, more or less unconstrained by any regulation whatever, developed a set of "tools" that they thought would allow them to hand off risk to other people. They didn't think through all the possible scenarios, and a worst-case scenario has occurred, and now they don't know what to do. See the parallel with Mickey and his brooms??

I'm not sure I want to go so far as to say that Hank Paulsen is the Sorceror, who will step in and wave a wand and make it all go away. I don't have that much faith in Mr. Paulsen.

I have a recommendation, however, for anyone who wants to understand how we got here. I don't normally listen to Ira Glass' This American Life. Today, however, they had a full hour program, Another Frightening Show About The Economy, which I recommend to anyone who wants to understand why that $700 billion bailout may really have been necessary. You may have heard the term "credit default swap"? This broadcast has the clearest description of credit default swaps, why they exist, and why they are a problem, that I've ever heard; and I worked for a major bank. There's also a solid description of the commercial paper market and why that is also frozen.

It'll take an hour of your time. It's worth it. They did a show in May called Giant Pool of Money, explaining the subprime mortgage mess, which I also plan to listen to, and they're putting out a daily podcast on the mess, Planet Money, which I think I'll add to my list as well.

1 comment:

  1. The financial "system" has detoured a good deal of the available capital out of the routine economy of profit and loss, and turned it into inflated excelsior. The money many people were "using" to buy homes and cars and vacations and graduate school degrees was borrowed. The Federal government, too, was living on borrowed money. Just how does a government borrow money from itself? Answer that one and you get a mint.

    Now a lot of that borrowing will turn sour. We've been exporting our jobs and investment capital abroad for the last 25 years, and sooner or later that had to have a negative effect. With no middle class, the American democracy pretty much goes into stagflation (dysfunction). Because a healthy middle class is what everything else--production, consumption, investment, etc.--is based on. Throughout the 80's and 90's, so-called savvy economists have been telling us we need to "compete" on a world-wide market: Think smart, work hard, be flexible, get more education, etc. But that was bullshit. Bottom line, America was losing the economic war with China and India and Indonesia. The latest credit crisis is but one symptom of this disease. If people can't afford to pay for their homes, then the real estate market falls apart. The same is true for every other product and material a capitalist society makes or trades in. Truncated economies--characteristic of third world countries like Mexico or Brazil or Arabia--are oligarchies. If no one was watching...well, America has become, or is rapidly becoming one of those. The media and the legislators are bought and paid for. And that includes our sweet little former liberal puppets like Diane and Barbara and Nancy. They're shilling for the corporations. The "bail-out"--gosh, does anyone remember that??--was just two days ago. Time flies in a recession. Wasn't that supposed to stop the bleeding? The Dow dipped as much as 720 points today, before "levelling" out at about minus 360.

    It's a nightmare that's just begun. Lift up your skirts, ladies, we're going through Hell.