Robert Reich on the economic crisis

As usual, Robert Reich is both cogent and absolutely right. You should read it all, but (emphasis mine):

First, understand that the main problem right now is not the supply of credit. Yes, Wall Street is paralyzed at the moment because the bursting of the housing and other asset bubbles means that lenders are fearful that creditors won't repay loans. But even if credit were flowing, those loans wouldn't save jobs. Businesses want to borrow now only to remain solvent and keep their creditors at bay... This means bailing out Wall Street or the auto industry or the insurance industry or the housing industry may at most help satisfy creditors for a time and put off the day of reckoning, but industry bailouts won't reverse the downward cycle of job losses.

The real problem is on the demand side of the economy.

Consumers won't or can't borrow because they're at the end of their ropes. Their incomes are dropping (one of the most sobering statistics in Friday's jobs report was the continued erosion of real median earnings), they're deeply in debt, and they're afraid of losing their jobs....

So the crucial questions become (1) how much will the government have to spend to get the economy back on track? and (2) what sort of spending will have the biggest impact on jobs and incomes?

The answer to the first question is "a lot." Given the magnitude of the mess and the amount of underutilized capacity in the economy-- people who are or will soon be unemployed, those who are underemployed, factories shuttered, offices empty, trucks and containers idled -- government may have to spend $600 or $700 billion next year to reverse the downward cycle we're in.

The answer to the second question is mostly "infrastructure" -- repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy, more energy conservation... Infrastructure projects like these pack a double-whammy: they create lots of jobs, and they make the economy work better in the future... Government should also spend on health care and child care. These expenditures are also double whammies: they, too, create lots of jobs, and they fulfill vital public needs.

I get a warm, happy feeling from the idea that this man is advising the president-elect -- even if he has Rubin and Summers and co. to contend with.

(Also, this should be a reminder that all Democrats who support a balanced budget amendment should be slapped. I'm looking at you, Bill Richardson. Deficit spending is an important economic stimulus.)

If only, Wal-Mart. If only

(Hello, everybody! Thus ends my prolonged blog-absence; I had rather more important things to do last week, and continuing intertube problems [for which I blame the angered Ted Stevens] this week. Apologies to my loyal readers -- both of you.)

The Wall Street Journal has a remarkable story today about Wal-Mart, whose profit margins depend largely on substandard wages and working conditions, quaking in fear at the thought that a 2008 Democratic victory will (via the desperately needed Employee Free Choice Act) force unionization on them. Look:

Wal-Mart Stores Inc. is mobilizing its store managers and department supervisors around the country to warn that if Democrats win power in November, they'll likely change federal law to make it easier for workers to unionize companies -- including Wal-Mart.

In recent weeks, thousands of Wal-Mart store managers and department heads have been summoned to mandatory meetings... The Wal-Mart human-resources managers who run the meetings don't specifically tell attendees how to vote in November's election, but make it clear that voting for Democratic presidential hopeful Sen. Barack Obama would be tantamount to inviting unions in, according to Wal-Mart employees who attended gatherings in Maryland, Missouri and other states.

"The meeting leader said, 'I am not telling you how to vote, but if the Democrats win, this bill will pass and you won't have a vote on whether you want a union,'" said a Wal-Mart customer-service supervisor from Missouri. "I am not a stupid person. They were telling me how to vote," she said.

Well... as heartening as this is to an old social-democrat crank like me, I have to caution: EFCA is just a small step toward restoring unions to the role they should play in the American workplace, a process which (if it happens at all) will take decades. Nothing will come overnight.

Besides, today's Democratic Party is hardly the working man's best friend; it is riddled with "business-oriented Democrats" like Chuck Schumer, Bill Richardson, and Mark Warner (not to mention Evan Bayh, and I should add that if he's chosen as Obama's VP I will have to consider ritual suicide). Once in power, it is an open question whether this party can overcome its ties to the business community and work to help the people who really need it.

Certainly from Wal-Mart's perspective, it's much less effective to fight and demonize Democrats than it is to just buy us. The very same WSJ article tells the tale:

So while I'm not going to say that this "RUN! DEMOCRAT REVOLUTIONARIES!" thing is just a corporate head-fake -- that's a level of mouth-frothing I'm not yet ready to embrace -- it's certainly true that one election and one new law won't bring unions into the retail market the way Wal-Mart (for whatever reason) wants people to think. We should work for even small steps in that direction, of course, but we shouldn't let our opponents define the debate.

Deregulation solves everything. Deregulation is magic. Deregulation is your father

Nathan Newman's little article about the failure of deregulation and the current financial crisis made me have an equally little thought -- remember after one of the more recent Wall Street shocks, I think it was the Bear Stearns collapse, when McCain went on TV and gave a big speech where he said the answer to our problems was more transparency and a simpler tax code?

My thought: Boy, that was stupid.

And baby makes five

I recall writing a blogpost five weeks ago called Next Stop: Bank Failures. Well, I'm not one to toot my own horn, but... Toot! Toot!

The federal government took control of Pasadena-based IndyMac Bank on Friday in what regulators called the second-largest bank failure in U.S. history.

Citing a massive run on deposits, regulators shut its main branch three hours early, leaving customers stunned and upset. One woman leaned on the locked doors, pleading with an employee inside: "Please, please, I want to take out a portion." All she could do was read a two-page notice taped to the door.

IndyMac -- whose slogan, wonderfully, was "You Can Count On Us" -- is the fifth U.S. bank this year to bite the dust. Something tells me it's not going to be the last.

(Note: FDIC insures every account up to $100,000, so most non-business and non-rich IndyMac account holders have nothing to worry about save some logistical hassles. Over that number, it's an open question. The government will sell off IndyMac's assets for whatever they can get, and go from there...)

Comparing the Obama and McCain tax plans

Look:

These are from the Tax Policy Center's new report (PDF here, it's dense and detailed but worth reading if you're a wonk) on the two presidential candidates' tax plans. The differences are pretty stark: McCain wants to keep the ludicrous Bush tax cuts (and, incredibly, cut corporate tax even more), while Obama wants to roll them back on the wealthy and introduce targeted exemptions and credits for everyone else. Consequently, as you can see above, the Obama plan produces an immediate gain for the bottom 80%, while McCain's is helpful to the top fringe. In the long term, working-class and middle-class Americans will benefit more greatly from the Obama plan, while McCain's plan overwhelmingly favors the ultrarich elite.

Another illuminating policy difference is the estate tax, which is levied on multimilliondollar inheritances (read: Daddy's yacht. And to preempt the inevitable Harvard Republican rebuttal, no, family farms and 96% of small businesses are NOT affected by the estate tax. Do your research). Obama will keep the current exemption levels (slated for $3.5 million in 2009) and set the rate above exemption at a sensible 45%. McCain, however, would raise the exemption to $5 million -- meaning someone who inherits $4.9 million would pay nothing on it -- and set the rate at just 15%. You don't need an economics degree to figure out what's happening there.

So in short: Democratic policy supports the interests of the middle and working class, while Republican policy amounts to a handout to the superrich elite. In other news, grass is green and the sky is blue. But this is a helpful reminder of both how radical John McCain (and the entire Republican Party) really is, and how basic the issues really are in 2008.

(from TaxProfBlog via TPM)

UPDATE (Monday, June 16): Paul Krugman argues in his column today that Obama doesn't go far enough in raising revenue, and has accepted the conservative framework that tax cuts are the best thing you can do for working people. It's a valid argument, but I think -- and this is one of the only times I've ever found myself disagreeing with Paul Krugman -- the key thing is the progressivity of the tax system. Raising taxes on the rich is preferable to raising taxes on everybody, and Obama's plan embraces that philosophy (in a way, also, that will make it very palatable to the public). The revenue we need for UHC and deficit reduction and whatever else can come from spending cuts (esp. in defense once we're out of Iraq) and further tax hikes on corporations and the highest brackets.

Obama's latest on the economy

MyDD's Josh Orton is right to cite Obama's speech today in Raleigh as evidence he's pivoting to a broadly ideological critique of conservative economics, and tying them directly to the present crisis. This is exactly what our discourse needs. Now, I wish he'd be more forceful and explicit in his criticism -- but I always wish that about Obama, and this is still a good start:

We did not arrive at the doorstep of our current economic crisis by some accident of history. This was not an inevitable part of the business cycle that was beyond our power to avoid. It was the logical conclusion of a tired and misguided philosophy that has dominated Washington for far too long.

George Bush called it the Ownership Society, but it's little more than a worn dogma that says we should give more to those at the top and hope that their good fortune trickles down to the hardworking many. For eight long years, our President sacrificed investments in health care, and education, and energy, and infrastructure on the altar of tax breaks for big corporations and wealthy CEOs - trillions of dollars in giveaways that proved neither compassionate nor conservative.

And for all of George Bush's professed faith in free markets, the markets have hardly been free - not when the gates of Washington are thrown open to high-priced lobbyists who rig the rules of the road and riddle our tax code with special interest favors and corporate loopholes. As a result of such special-interest driven policies and lax regulation, we haven't seen prosperity trickling down to Main Street. Instead, a housing crisis that could leave up to two million homeowners facing foreclosure has shaken confidence in the entire economy.

I understand that the challenges facing our economy didn't start the day George Bush took office and they won't end the day he leaves. Some are partly the result of forces that have globalized our economy over the last several decades - revolutions in communication and technology have sent jobs wherever there's an internet connection; that have forced children in Raleigh and Boston to compete for those jobs with children in Bangalore and Beijing. We live in a more competitive world, and that is a fact that cannot be reversed.

But I also know that this nation has faced such fundamental change before, and each time we've kept our economy strong and competitive by making the decision to expand opportunity outward; to grow our middle-class; to invest in innovation, and most importantly, to invest in the education and well-being of our workers.

We've done this because in America, our prosperity has always risen from the bottom-up. From the earliest days of our founding, it has been the hard work and ingenuity of our people that's served as the wellspring of our economic strength. That's why we built a system of free public high schools when we transitioned from a nation of farms to a nation of factories. That's why we sent my grandfather's generation to college, and declared a minimum wage for our workers, and promised to live in dignity after they retire through the creation of Social Security. That's why we've invested in the science and research that have led to new discoveries and entire new industries. And that's what this country will do again when I am President of the United States.

Also, here's a quote that certain Harvard friends of mine should ponder for a while:

We do the cause of free-trade – a cause I believe in – no good when we pass trade agreements that hand out favors to special interests and do little to help workers who have to watch their factories close down. There is nothing protectionist about demanding that trade spreads the benefits of globalization as broadly as possible.

Next Stop: Bank Failures

Hello everybody! Enjoying your summers? Well, I intend to put a stop to that right now.

Over the coming months, we expect banking institutions to continue to face deteriorating loan quality. House prices are still declining sharply in many localities and losses related to residential real estate--including loans to builders and developers--are bound to increase further. In addition, weak economic conditions could well extend problems to other segments of lending portfolios including consumer installment or credit card loans, as well as corporate loan portfolios. Moreover, banking organizations must be prepared for the possibility that liquidity conditions become tighter if uncertainties in the capital markets fail to subside or if credit conditions deteriorate significantly. Accordingly, we anticipate that the number of banks with less than satisfactory supervisory ratings will continue to increase from the relatively low levels that have existed in recent years and we are monitoring developments at all supervised institutions closely.

That's Fed vice-chairman Donald Kohn. Loosely translated, he's saying that the continuing implosion of every loan in America will soon endanger American banks.

Now, in Boston and other Northeastern cities, you mostly hear about the big national banks, who are no doubt suffering (*cough* Citigroup) but whose total failure would probably not be permitted by risk-averse regulators. In much of the country, though, banking is primarily local. Out here in Denver -- from which I might provide a real update sometime soon, if I can ever get off Interstate 225 -- there's a preponderance of local banks and credit unions, with names like "Bank of Denver" and "Rocky Mountain Savings Bank" and "Western Bank of Colorado" and "DenverWestBankMountainBankWestBankBank" and whatever the hell else. Now, if the economy continues on its current path (and bear in mind that mortgage loans were only the first to collapse; there are indicators that auto loans are next, not to mention appliances and of course consumer credit), can small institutions like this really be expected to survive? How much can the FDIC handle? Anyone? Bueller?

Above: All the hot trends start in England

Filed under: banking • Denver • economics • impending disaster • the real issues

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Just a note on today's economic figures

You may have heard about the Labor Dep't statistics released today showing a little decline in the unemployment rate and a "smaller-than-expected" contraction in jobs. This has caused Drudge, typically, to flip shit and argue that the economy is rebounding. Now, this is obviously insane for a couple different reasons -- but I want to remind everybody that the real story is still wages:

Companies are cutting working hours, even as many avoid layoffs. Those working part time because of slack business or out of failure to find full-time work swelled from to 5.2 million in April from 4.9 million in March. In percentage terms, employees working part time involuntarily climbed to the highest level since 1995.

The average weekly pay for rank-and-file workers — about 80 percent of the American work force — fell $3.55 in April, to $602.56 in inflation-adjusted terms. This figure has been generally falling since the end of 2006. Gains in pay have been canceled out by the soaring costs of food and energy.

Awesome rebound!

UPDATE (6 PM): Mike Shedlock argues that the numbers are simply bogus.

Meanwhile the economy continues to implode

For the love of god, everybody, who cares about Clinton and Obama anymore -- THIS IS THE REAL NEWS:

In the 12 months ended in February, the Case-Shiller home price index, which measures the value of single-family homes in 10 major metropolitan regions, fell 13.6 percent, the biggest decline since records began in 1987. A broader 20-city index dropped 12.7 percent.

The slump in home prices was more severe than the worst point of the recession of the 1990s, the last time values fell so far, so quickly.

[...]The fall in home prices has also cut into Americans’ home equity and forced many to grapple with mortgages now worth more than the house itself. The problems have contributed to a deepening gloom, which was reinforced on Tuesday by a grim confidence survey released by the Conference Board.

The private report, which surveys up to 5,000 American households, dropped to its lowest point since March 2003, at the start of the invasion of Iraq. Americans feel worse about the economy’s prospects than any time since the mid-1970s, and many are bracing for job losses...

WHY ARE WE STILL TALKING ABOUT JEREMIAH WRIGHT WHILE THIS IS HAPPENING GAAAAAAAHHHHH

(via Working Life)

Bush & Paulson's Awful New Financial "Regulation" Scheme

STILL IN CANADA STOP -- CAN ONLY COMMUNICATE BY TELEGRAM STOP -- LOOK AT THIS BULLSHIT STOP --

WASHINGTON (AP) -- The Bush administration is proposing a sweeping overhaul of the way the government regulates the nation's financial services industry from banks and securities firms to mortgage brokers and insurance companies.

The plan would give major new powers to the Federal Reserve... the Fed would be given broad authority to oversee financial market stability.

SOUNDS GOOD RIGHT STOP -- EXCEPT THE ACTUAL PLAN DOES NO SUCH THING STOP --

While the plan could expose Wall Street investment banks and hedge funds to greater scrutiny, it carefully avoids a call for tighter regulation.

The plan would not rein in practices that have been linked to the housing and mortgage crisis, like packaging risky subprime mortgages into securities carrying the highest ratings.

The plan would give the Fed some authority over Wall Street firms, but only when an investment bank’s practices threatened the entire financial system.

And the plan does not recommend tighter rules over the vast and largely unregulated markets for risk sharing and hedging, like credit default swaps, which are supposed to insure lenders against loss but became a speculative instrument themselves and gave many institutions a false sense of security.

Parts of the plan could reduce the power of the Securities and Exchange Commission, which is charged with maintaining orderly stock and bond markets and protecting investors... The blueprint also suggests several areas where the S.E.C. should take a lighter approach to its oversight. Among them are allowing stock exchanges greater leeway to regulate themselves and streamlining the approval of new products, even allowing automatic approval of securities products that are being traded in foreign markets.

IF THIS IS "BROAD AUTHORITY" THEN I'M THE QUEEN OF ENGLAND STOP -- IT'S JUST A TROJAN HORSE FOR RIGHT-WING DEREGULATIONISM STOP -- ANYONE WHO THINKS THIS WILL END THE CURRENT FINANCIAL CRISIS NEEDS THEIR HEAD EXAMINED STOP -- THIS IS WHY WE NEED DEMOCRATS IN POWER STOP

ENJOY THE REST OF SPRING BREAK AND SEE YOU ALL NEXT WEEK STOP

White picket fences, 50% off

Our old friend Garrett, over at his and Mel's new place (it's called "Legion," and it should be on your daily reading list), has a thought-provoking post today. Responding to Matthew Yglesias's enthusiastic citation of the Richard Florida argument -- basically, that homeownership ties people down and impedes the modern, transurban "creative class" economy -- Garrett writes:

I don’t see enough of a critical stance taken by Yglesias or Florida of the underlying premise—that salaried transience is a good thing that we should be supporting. It’s no secret that I’m a huge opponent of New Urbanist garbage, and here’s an example why. For better or worse (I personally feel for better), the United States’ political system is still set up around a Jeffersonian notion of civic involvement inherently tied to associations of place. Even in metropolitan areas, American political and social identity is cemented by the admixture of people into the contingencies of physical space.

In my assessment, this is the most modern and equalitarian of all worldviews. Detaching people from place and making them salaried sharecroppers of post-industrial capitalism trends towards an epistemology of hyper-individualistic Objectivism. Moreover, it’s plainly a stressful way to live: the sociological data on divorce, mental health, and reported levels of happiness confirms that the transient salaryman is living a life of neither individual fulfillment or communal contribution.

Instead of attacking the concept of homeownerhsip, I think what’s needed is a public policy which promotes intelligent, well-articulated subsidies of personal involvement in a spatial context.

Well, personally I'm of the belief that the so-called "creative class" consists of, like, fifteen people who all live on the East Coast and write blogs. Which would make the point moot. But let's take the argument at face value and assume that if today's job market actually demands people move around a lot, and if homeownership is impeding that movement, then shouldn't that concrete economic need supersede Garrett's more abstract social needs?

After all, it's not like there's plenty of jobs out there, and what little money we are making is buying less and less. People -- hell, parents -- are increasingly working 2 or 3 jobs just to pay the bills. (Cue George Bush: "Uniquely American, isn't it? I mean, that is fantastic!") If there's good work to be had somewhere, we ought to support the position that permits people to do it -- since liberals are, as I understand it, generally pro-employment.

And we're seeing the impact that the wild spread of homeownership is having on working people. After decades of ridiculous and untenable expansion in the housing market -- capitalism gone wild, basically -- we're now seeing a painful reaction in the form of the subprime crisis, which hit millions of working Americans right in the ass. Let's not pretend this problem is going away, either; foreclosure rates are still soaring and show no signs of slowing down. The Atlantic has a discomforting article this month about the growing presence of "suburban slums," once-populated places so blighted by foreclosure that they're just decaying into crime-ridden wasteland. This obviously is not a model that liberals should want to prop up.

So while I feel for Garrett's concerns about "fulfillment", "communal contribution," and staving off individualist wrongthink, we can't justify elevating those needs over public economic survival. Not that that'd be possible if we wanted to, considering Maslow's pyramid; you can't have self-actualization without security of resources, and you can't have Jeffersonian democracy if people can't afford gas to drive into town. There's a place for fantasies about American place and community -- "We belong to the land! A-yippie-o-e-ay!" -- but let's keep our priorities in line...

UPDATE (Thursday 2 PM): Garrett responds. I respond back in comments. PARTY!

Real Wages Still Declining

To pivot from the horserace for a minute -- here's a reminder, from the invaluable Economic Policy Institute, of what our eventual nominee (whoever it is) will be up against:

(click for full size)

This tracks yearly change in real earnings for non-management service and blue-collar workers. Notice which direction they are moving. This will be the issue of 2008.

...Remember in August when everyone said the subprime crisis was just a blip, an isolated case, and there was nothing wrong with the economy? Yeah, about that...

(via Chris Hayes)

Obama's finally talking economic justice

This is a good start, anyway:

We are not standing on the brink of recession due to forces beyond our control. The fallout from the housing crisis that’s cost jobs and wiped out savings was not an inevitable part of the business cycle. It was a failure of leadership and imagination in Washington – the culmination of decades of decisions that were made or put off without regard to the realities of a global economy and the growing inequality it’s produced.

It’s a Washington where George Bush hands out billions in tax cuts year after year to the biggest corporations and the wealthiest few who don’t need them and don’t ask for them – tax breaks that are mortgaging our children’s future on a mountain of debt; tax breaks that could’ve gone into the pockets of the working families who needed them most.

It’s a Washington where decades of trade deals like NAFTA and China have been signed with plenty of protections for corporations and their profits, but none for our environment or our workers who’ve seen factories shut their doors and millions of jobs disappear; workers whose right to organize and unionize has been under assault for the last eight years.

[...]So today, I’m laying out a comprehensive agenda to reclaim our dream and restore our prosperity. It’s an agenda that focuses on three broad economic challenges that the next President must address – the current housing crisis; the cost crisis facing the middle-class and those struggling to join it; and the need to create millions of good jobs right here in America– jobs that can’t be outsourced and won’t disappear.

YES OBAMA! MORE! MORE! MORE!

Hardcore populists like yours truly have kind of been in the weeds since Edwards dropped out; neither frontrunning candidate has done much of anything to address class and economic issues. Like Edwards himself, reportedly, I'm torn between Clinton and Obama. (For the record, in the Massachusetts primary I voted for Hillary, but completely without enthusiasm.) So it's very nice to see Obama -- who thus far has been pathologically averse to anything that even hints at class consciousness -- finally stepping up and delivering a real, solid, Democratic economic message. Or at least part of one; this is still pretty timid stuff, and I'd like to hear him address corporate control of politics (plus, in a dream candidacy, the problem of right-wing market orthodoxy), but at this point you take what you can get.

Of course, this could just be a strategic move to peel off more of Hillary's white working-class base (which he's already been doing with some success), but what the hell. Like David Sirota said today, opportunism is not really a problem if it leads us to the right policies. I don't give a damn if Obama is sincere or not; every minute he spends saying this to his supporters is a step forward for progressive populism. He's got a lot of ground to cover yet before I'll buy it, of course, but this is a heartening beginning.

...Along similar lines, here's Obama showing some uncharacteristic rhetorical muscle (directed at McCain, no less) in Baltimore on Monday. The tough-guy stuff works for him, believe it or not:

This is not Obama the friendly hopemonger; this sounds like a candidate who's ready to close the deal and lead his party into battle. It's just what skeptical voters like me are looking for. And with Hillary's campaign seemingly stuck in second gear, now would be the perfect time for him to make that move...

Keep an Eye on Huckabee

So I've been putting off writing about Mike Huckabee's strong showing in the Ames Straw Poll, for two reasons. One, because it makes me a little nervous, as I'll explain below; but mostly because I've been waiting for online video of Huckabee's speech from Ames. Alas, it doesn't look like it's going to appear, which is a shame -- because it was a remarkably good speech. It had me open-mouthed, that's for sure.

(Yes, I watched the Iowa Straw Poll. Live on C-SPAN. What, like you were doing something so cool with YOUR time, big shot.)

Mike Huckabee -- and if you think his name is funny, bear in mind that the man who succeeded him as Governor of Arkansas is called "Beebe" -- is a very different kind of Republican, especially as compared to the rest of the GOP field. On social issues, he's as hard-right as you'd expect from an Baptist minister-turned-politician, and on foreign policy he's undistinguished; but on economics (a.k.a. the real issues) it's a whole different kettle of fish. Huckabee is a populist, the ramifications of which should not be underestimated. After the jump...

Read more »

This problem is not just on Wall Street.

You'll have heard today about the crisis on the markets; the Dow plunged yesterday and looks to keep falling today, the European markets took nosedives, etc. Apparently these horrible specious mortgages we've been handing out like breath mints the past few years are finally collapsing in on themselves, and -- to generalize the situation -- it's causing a chain reaction across the world economy.

(The first thing I'd like to say: people are calling it "panic." This is not panic, this is a perfectly understandable and predictable selloff; saying "panic" is a transparent attempt to minimize the seriousness of the situation. Trust me, you'll know when you see panic, and it'll involve stockbrokers leaping out of buildings.)

...So I don't know enough to write intelligently about machinations within the financial sector itself; for a primer, read this lucid NYT article, and then Krugman's ominous analysis. Bonddad is also worth reading, as always. (And of course you'll want to keep an eye on CNBC as things develop.)

But what keeps coming back to me are the ramifications of this problem on regular Americans. We've already seen that home foreclosures have been spiking (as I wrote about two weeks ago), and that might be just the tip of the iceberg. WaMu and Countrywide are saying -- already -- that they're having serious trouble finding buyers for their loans, which means that the stream of capital is drying up altogether. And this government-injected liquidity everyone's excited about is, let's face it, a Band-Aid measure at best. If this keeps up, institutions are going to have to scale back their mortgage operations severely, and next thing you know, poor people can't buy houses anymore and that bubble is burst for good. So long, construction industry!

Meanwhile, because these poison-pill loans are spread out across the world markets, it's going to have ramifications in every imaginable sector, including trade. (At this point can we pause and get a HOO-RAH for globalization? Thanks, Thomas Friedman!) Recall that it was a French bank that kicked this thing mainstream to begin with.

So the point is that we have a giant economic clusterfuck that will potentially screw everyone involved, or standing in the surrounding area. And here -- I love this -- is the most cogent solution to the problem I have yet seen proposed, from the newly Murdoch-ed Wall Street Journal (emphasis mine):

What's becoming clearer by the day is that we're watching the unraveling of a global real estate financing bubble. The U.S. subprime market is the heart of the problem, but financial innovation has spread the risk around the world in a way that wasn't possible a generation ago. Long-term assets -- real estate -- have been financed by hedge funds with short-term debt instruments, and the amount of the debt now exceeds the value of the collateral in these subprime investments. Somebody is going to have to swallow the difference...

The larger point here is that the losses should be absorbed by the hedge fund promoters as well as by the investors. That means by the equity holders in Paribas, Bear Stearns or any of the other big and supposedly safe financial institutions that decided to play in the subprime casino. [...] The subprime mess needn't derail the global economy, and it is less likely to do so if Paribas and the other hedge fund operators meet their obligations. Having some of these financial firms swallow the losses for running lousy funds may teach everyone a few salutary lessons about risk.

Yes. The Wall Street Journal, representative of our finest economic minds, proposes that Bear Stearns and BNP Paribas and all the other financial behemoths of the world should bite the bullet and quietly accept the verdict of the free market. Call me cynical but I'm not going to stay up nights waiting.

No, what we're going to get is more of these stupid government "liquidity" handouts to Big Finance, so Bear Stearns can continue to fuck around until its executive board is safe in the Cayman Islands, and isn't it a shame about everyone else's pension -- or, if we take the current logic, until this ever-so-silly "panic" subsides and the market rights itself again, Morning in America etc etc. And there may be something to that; who knows, this might well just be a temporary correction. All the respectable analysts seem to think so.

That is, except the CEO of Fannie Mae, who says the housing trouble is going to last up to a year. But hey, no biggie! He proposes to single-handedly solve the problem, by having the government let -- what a coincidence -- Fannie Mae invest more in the lending market. More liquidity, you understand.

And take a wild guess who gets the shaft when that strategy collapses. Hint: it's not Fannie Mae.

...Something tells me that within a few months, neither Pakistan nor TEH GAY is going to be the top issue in the '08 presidential race. Millions of Americans may be looking at economic ruin because of irresponsibility they had absolutely nothing to do with; and I don't know about you, but I suspect that's going to make people angry. So buckle your seatbelts, kids, we're in for a ride. And hang on to your wallets.

UPDATE (12:45 PM): The tide is being stemmed by that big Fed intervention, but things are still volatile and I suspect this "rebound" is temporary.

Also, Atrios points to a very, very good article by Nouriel Roubini pointing out that liquidity is not the root of this problem, old-fashioned insolvency is the root of this problem:

First, you have hundreds of thousands of US households who are insolvent on their mortgages. And this is not just a subprime problem: the same reckless lending practices used in subprime – no downpayment, no verification of income and assets, interest rate only loans, negative amortization, teaser rates – were used for near prime, Alt-A loans, hybrid prime ARMs, home equity loans, piggyback loans. More than 50% of all mortgage originations in 2005 and 2006 had this toxic waste characteristics. That is why you will have hundreds of thousands – perhaps over a million - of subprime, near prime and prime borrowers who will end up in delinquency, default and foreclosure. Lots of insolvent borrowers.

You also have lots of insolvent mortgage lenders [... and home builders ... and hedge funds ... and financial institutions ...]

This is not just a liquidity crisis like in the 1998 LTCM episode. This is rather a liquidity crisis that signals a more fundamental debt, credit and insolvency crisis among many economic agents in the US and global economy. Liquidity runs can be resolved by the liquidity injections by a lender of last resort... Thus, while the Fed and the ECB had no option today but to provide massive liquidity in the presence of a most severe liquidity crunch and run, they should not delude themselves that this liquidity injections can resolve the deep insolvency problems of many overstretched borrowers: households, financial institutions, corporates. Insolvency/credit crises lead to financial and economic distress – hard landing of economies – and cannot be resolved with liquidity injections by a lender of last resort. And now the vicious circle of a weakening US economy – with a housing recession getting worse and a fatigued consumer being at the tipping point - and a generalized credit crunch sharply has increased the probability that the US economy will experience a hard landing.

I know this is dense and difficult stuff, but it's absolutely critically important to understand. Go slog through Roubini's entire article.