House of cards economy

I was going to try to condense the Economics 101 I've been scrambling to learn this past week, but I can do no better than suggest you read my friend Mickie Nardo's post this morning, "the virtual economy" on his blog, http://1boringoldman.com/index.php/2008/09/22/the-virtual-economy/

Here's an excerpt: "So why would lending institutions want to make bad loans? That makes almost no sense. It’s because it gives them something that looks like it has value. With deregulation, mortgages became a commodity - something of presumed value to trade. Disconnected from the actual loaning institution and property, they have been traded like baseball cards - having a value disconnected from their origin [bubble gum]. But they’re supposed to have value, so they’re insured. But then the loan insurance becomes a commodity disconnected from the loans and the liability, and the insurance is traded. All of this trading generates a lot of money for the traders. So long as these loans have value, and their insurors have assets, things are fine in a rising market. But when the bad loans default and the insurors have no assets to cover the defaulting loans, and the banks have hidden their liabilities in something called "debt transfers," the house of cards collapses."

Mickie goes on to fault the mania for deregulation brought in by the Reagen Revolution and championed by Phil Gramm more than anyone else in Congress. Phil Gramm = McCain's chief mentor/champion in finance policy and a possible Secretary of Treasury in a McCain administration. He would then inherit the role of tzar in this bailout plan they're stampeding through, empowered to buy and sell huge amounts of assets, selectively, without oversight or regulation, making it possible to reward friends and punish enemies -- BIG TIME. Gramm also happens to be VP and chief lobbyist of one of the international banks that wants in on the pie.

So, folks, this is the result of deregulation. It allowed our economy to become a house of cards: fine as long as nothing shakes it but vulnerable to collapse when things go bad. And now they want the taxpayers to provide the stable foundation so they can keep on doing the same thing.

The two main immediate steps that need to be taken to stabilize the crisis, it seems are: (1) restore investors' confidence so they don't pull all their captial investments out of the system, and (2) provide a basis to keep the credit lines open so businesses can borrow operating money and prevent further collapses.

But let's remember that Paulson was a hugely successful investment banker and deal maker before he came to Treasury. He knows how to work within the system. But that needs to be tempered by someone who stands back and looks at the system and says: we need to change the system, not just prop it up; and we must require that they accept oversight and regulation.

That's what I think, here on Monday morning.

Ralph