Here is Kos earlier today referencing Bower's assertion on Open Left that there is no crisis. To be fair, Kos hasn't quite "gone there" yet, but he comes close in this diary. As I continue to follow the left-liberal blogosphere on this issue, I have become increasingly alarmed that signficant people on the left blogosphere just don't get it.
In this diary, I am going to try to explain:
- Why we really are in a crisis;
- What we can reasonably do to resolve it;
- The political risks involved.
My position boils down to one I have advocated here previously-fix the bailout-don't reject it. I also build on concepts I developed last night about our choice between "liquidate, liquidate" vs. "liquidity, liquidity."
First, let's clearly define what a crisis is and what different kinds of crises one can have and then we can understand why this current crisis really is a crisis.
Crises are almost always preceded by speculative booms (a concept I explored at length last night). Because speculative booms lead investors down a primrose path towards paying more for financial (or other) assets than can be warranted given any realistic guesstimated stream of future benefits the crash of the speculative boom always leaves some people holding assets that are worth far, far, far less than was paid for them. If you leveraged to buy these assets, then you cannot pay the debt that you incurred to buy the asset. And as John Maynard Keynes is rumored to have said-if you owe the bank 10,000 pounds, you have a problem. If you owe the bank 1 million pounds, the bank has a problem.
There are lots of ways crises can develop. In 1996, I was living in Bulgaria and witnessed first hand the impact of an exchange rate-debt-banking crisis that came very close to producing mass violence. It did produce hyperinflation and even as a relatively wealthy American with dollars living in Bulgaria, there were times things got real scary: like the time my wife literally bribed a taxi driver to drive through burning barricades of tires. And even as a relatively wealthy American I could not ignore the impact of the attendant hyperinflation and the sickening feeling as the Bulgarian lev fell from 66 to the dollar to 2000 to the dollar and Bulgarian "babushkas" tried to eke out a living on $10 a month when the value of their pensions was destroyed. Bulgaria's crisis was only resolved when drastic monetary measures were imposed on it by the IMF in the form of A Currency Board. Bulgaria's crisis was brought on by accumulation of external debt, stemming from the period of Communist rule and the lack of any kind of effective oversight of the banking system.
Two years later, when I was back in the U.S. I watched this time as a speculator as the lack of attention to banking rules and financial market rules helped to lead to the Russian Financial Crisis. And of course, in the 1990's we also saw the "Tequila Crisis" and the "Asian Currency Crisis." So if Kos and Bowers want to opine about the non-existence of crises, I want them to live through and witness first hand the sickening horror of its final impact.
Crises occur at the moment that the system becomes insolvent. Banks become unable to lend or unwilling to lend at any rate of interest. As Banks go under there is no more money for loans. That means your ATM will not work. The origins of this crisis are without doubt (once again)the combination of speculative debt structures, the lack of oversight and the powers that be fiddling while the system melts down. It's a recurrent pattern.
As of right now, we are in danger of at least one other major bank failure. We are in danger of a massive panic sell off in Wall Street. And as the "real" economy (that part of the economy geared towards actually producing things) collapses, more mortgages and more financial institutions will go under. And when that happens, we will all be left holding the bag and it will cost us far more than the estimated $2400 per person price tag at the present moment.
Now, what are the politics of this? As I outlined last night we have two choices-liquidate, liquidate, liquidate, or "liquidity, liquidity, liquidity" (as Paul Davidson puts it) combined with "regulate, regulate, regulate."
Any strategy of liquidity and regulate obviously must be combined with oversight and accountability. Obama, Dodd, and many other Democrats have made this clear. It must also be combined with plans to help working Americans pay their bills-again, as Obama, Dodd and many other Democrats have emphasized.
Absent accountability, Democrats not only must, they will vote no. I agree with that. But with mechanisms of accountability installed, we should leave it to the Republicans to play the "liquidationist" card (which is increasingly what they are arguing for even as they try to disguise it). That puts us Democrats rightly in the position of responsibility and oversight while Republicans try to sell liquidate, liquidate. Now, as a Democrat, that is a contrast I am quite willing to sell to the American public.
So yes Kos and Bowers (and Sirota) there is indeed a financial crisis.