Trying to understand what is going on

Total economic meltdown sure is confusing, isn’t it?

So where to turn for helpful information? Well, the sense I’m getting is: while many experts know and agree on what’s happening (collapse of mortgages and mortgage-backed derivatives, collapse of other lines of credit, credit crunch across the board), we are in uncharted territory as far as what happens next and the consequences for our national and global economies. Here are some links to articles that might be helpful based on looking around quite a bit:

  • Post today by Dean Baker in TPM : “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.”
  • Paul Krugman — particularly Crisis Endgame (“This flight to safety has cut off credit to many businesses, including major players in the financial industry — and that, in turn, is setting us up for more big failures and further panic. It’s also depressing business spending, a bad thing as signs gather that the economic slump is deepening.”).
  • Pretty serious macroeconomic analysis from Brad DeLong, concluding, “there is now no time for tolerance of the three objections to this analysis and this plan of action, roughly: (1) it’s immoral, (2) it’s unfair, and (3) it can’t work in the long run.”
  • RGE Monitor — Financial intelligence company with limited free membership during this crisis. My friend Jarrett highly recommends Nouriel Roubini’s Global EconoMonitor, e.g.

There’s much more out there, but my own conclusions, in trying to keep things simple in my own head, are that (a) we have been in a bubble since the close of the Clinton years; (b) Greenspan refused to pop the bubble, instead superinflating it; (c) exotic new financial products multiplied the force of the bubble many times greater than normal; (d) the final popping of the bubble will have real and psychological effects that will crash the economy to below where it “really” is right now.

There’s nothing that policy and leadership can do, now, about (a)-(c). We can only hope that wise leadership will steer us away from (d) if at all possible…

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