Bailouts and bank failures oh my

So: Wachovia gone. Banks not lending money but instead stashing it in their vaults -- which, BTW, causes deflation, since you are in effect increasing the reserve ratio (see: Fractional Reserve Banking) and thereby decreasing the amount of money in the system. People having trouble getting loans because of the deflationary pressures. Retirement systems and 401(k) investors that thought they were avoiding risky stocks by buying into bond funds are stuck with "AAA" grade mortgage-backed bonds that are now worthless because nobody will buy them because nobody knows which bonds have "real" mortgages backing them and which bonds are backed by toxic mortgages that will never be paid. 2 trillion dollars of housing wealth disappears out of the economy over the past two years, and the stock market plunges 9% disappearing another $1.2 trillion out of the economy.

Folks, there's enough canaries warblin' and croakin' in this coal mine to make any economist who has studied the time period 1930-1932 shudder in his boots. Deflationary spirals aren't some fiction invented by Keynesian economists. We have hundreds of years of experience with them, albeit the last time we experienced one was in the period 1930-1932. So in all of this, one of the foremost scholars of the Great Depression, Fed chairman Ben Bernanke, proposes a bailout swapping Treasuries for mortgage-backed securities that will hopefully stabilize the money supply before things go to hell in a handbasket in a spiral that won't be stopped short of complete economic collapse, and gets a Republican Treasury Secretary and a Republican President to present it to Congress and... a majority of Republicans vote against it.

Yeppers. A majority of Republicans won't vote for a Republican written solution that their own President and their own Presidential candidate wants them to pass.

Now, granted, there's one hell of a cacophony out there saying "don't pass this law!", from loony lefties who see it as a "bailout of Wall Street" (uhm, my 401(k) isn't "Wall Street", it's my retirement!) to Republicans who want a deflationary spiral to happen because deflationary spirals always transfer the wealth of the nation from the debtor class (you and I) to the creditor class (the wealthy elite). Add in the fact that the Bush Administration has all the credibility of a Liars Club meeting, and far too many people are willing to ignore what most of the reputable economists are telling them because their "gut" tells them different. But the facts on the ground are pretty friggin' scary right now if you look at just how much dough is vanishing out of the economy. Yes, the Fed is printing money like crazy, sending over $600 billion this week to foreign banks for example. But the Fed can't just create money and have that money go to work doing something useful. That money has to get into the economy somehow. Without a functioning banking system that's pretty damned hard.

So much for that. What irritates me is that people who know nothing about economics keep making these grandiose statements about what the "right" thing to do is, when what they generally suggest would be the worst possible thing to do. Folks, housing prices have to come down. They were way out of the affordability range for most families, and the bubble has to be burst all the way back to an affordable price or we can never get the housing economy working right. But most of the solutions offered by loony lefties and tighty righties both are based on keeping housing prices up, when clearly housing prices in the most severely hit parts of the country were way out of line with people's incomes in those areas and thus have to come down if anybody is going to be able to afford homes in those areas with a conventional mortgage. Then there's the Rethugs who want everybody to take their lumps -- banks, investors, everybody -- but the problem there is that you end up with a deflationary spiral and things go to hell in a handbasket for everybody but the top 5% of the nation (Republicans, naturally!). The fact of the matter is that there are no easy ways out of this now. The only way out would be to go back to 1999 and head off the Internet bubble before it got out of hand, or go back to 2002 and head off the housing bubble before it got out of hand. But nobody did that, and so now we're stuck between a rock and a hard place, an unsatisfactory solution and utter disaster. And, sadly, the majority on both left and right seem more eager to have utter disaster than to compromise their oh-so-sensitive sensibilities in order to pursue a solution that is unsatisfactory but the best we can do given the situation... literally putting principle over reality.

Sigh. Gotta go, need to stock up on rice and beans and flour and corn meal and egg and milk powder...

-- Badtux the Discouraged Penguin