The best explanation I’ve read for the Wall Street Meltdown.

I said before that I don’t really understand the economics of the financial crisis the country is currently in the midst of, but Jim Wright over at Stonekettle Station sets me straight:

Hubris, the belief that great men dare greatly, and that should disaster fall, those great men should be rescued at the expense of others, set back on their feet, and allowed to try again.

And Hubris, my friends, is exactly what brings us to the current disaster unfolding in the United States financial sector today.

Just like with the Titanic, prideful greedy men set on us a course for disaster. Those captains of Wall Street, in their pride and arrogance, deliberately ignored the lessons of history, 1929, the S&L crash of the 70’s, the Dot Com bust of the 90’s, and all the rest of it. They ordered the boilers lit and the throttles pushed hard to the stops, in order to line their own pockets and to advance their own hubris, and they took all of us down here in steerage along for the ride.

And when we slammed head on at full speed into the iceberg, those arrogant bastards were the first ones to the lifeboats, – or the golden parachutes, choose your own analogy here – demanding safe passage from the crew, or in this case, the government, as they believe is their right.

And, just exactly like the pride of White Star Lines, there’s not enough lifeboats to go around, and a lot of us are going to be left to sink or swim in the icy wine dark water.

OK, I’ve pushed the Titanic analogy to the breaking point – but the comparison is apt.

Now that’s terms I can wrap my head around. Jim goes on to explain the why of why we need to bail out Wall Street even though it would be more satisfying to let it crash and burn. Jim doesn’t have a lot of solutions, but then, like me, he’s not an economics expert. He does have an excellent grasp of the situation and why it’s a problem and why we need to do something about it and how anything we do is going to be far from a perfect solution. All of which helps me to put it into sharper perspective myself. It’s a good read. I’ll be adding Jim to my blogroll.

13 thoughts on “The best explanation I’ve read for the Wall Street Meltdown.

  1. I’m not an economist, but here’s how I see it…

    You would think that a company has some cash in the bank, uses it to buy/make inventory, sell it, and skim off the profit. Lather, rinse, repeat. As opposed to this naïve view, companies tend take out a small loan to make stuff to sell or to pay salaries, then pay back the loans from the proceeds of their business. In short, the whole U.S. economy is a giant advance fee scam.

    Right now, it’s not that the underlying economy is necessarily in bad shape, but financial institutions failing left and right, those who have money to loan lose trust in getting their loans repaid. This makes credit more expensive and between the losses in the financial world and the loss of trust, liquidity will dry up. If that passes a threshold, the U.S. and consequently world economy will take a crash dive. Think Great Depression or worse.

    The bailout is really just a psychological band-aid to prevent the squeaky wheels from locking up completely. As long as a critical mass of liquidity remains, hopefully the economy will muddle through—even if Wall Street will never be the same again.

    How bad things really are is something I can’t answer.

  2. That’s an excellent analogy.  One addition I’d make is that the governments idea how to rescue the people in the water would be to give White Star lines a bunch of wood to make rafts so they can go rescue them.

  3. Interesting read: America, Where It Pays to Fail

    More than 100 years ago, German sociologist Georg Simmel criticized the banks for being even bigger and more powerful than the churches. His chief complaint—that money is the new god of our times—is still heard today. If Simmel was right, and there are some indications that he was, his statement would have to be modified to suit today’s circumstances: Not all people pray to the same god.

    Among the money worshippers, there are at least three faiths. First there are the Puritans, who patiently carry their money to the new churches, hoping that it will multiply. The average Chinese, for example, deposits 40 percent of his income in banks. What laudable discipline! Then there are the Pragmatists. They save and lend, but only in that order; their savings limit their boldness. This persuasion is especially prevalent in the Germanic countries, where the savings bank is the shrine.

    Finally, we have the religious community of the Uninhibited, which is especially popular in the United States. Its adherents readily admit to intentional recklessness, wanton waste and omnipresent greed.

    They call it “the American way of life.” Its members live in the here and now, without asking questions about tomorrow. One lends money to another, even though it’s not his money. Instead, he has borrowed it from a third person, who has promised to procure it from a fourth person—and so on.

  4. It’s nice. Mark Chu-Carroll did a nice explanation, not nearly as concise as the above, though. Definitely helps to replace outrage with humour (for those of us to whom outrage seems useless, anyhow).

    The important thing to bear in mind is that, regardless, we are going to suffer the consequences. We want this to be over as fast as possible (hah!) and to stave off another bubble for a decade or two.

  5. Here’s the thing, though-this isn’t at all the first time this sort of thing has happened. We’ve got several histories of banking crises large enough to pose a direct threat to a country’s economy and a host of solutions that were employed. I’d prefer something like the solution Sweden used in 1992 to anything like the bailout package that was voted on.

    (“The actions taken during and after the bailout by the Secretary are not subject to review or court…” WTF?)

    Especially when it was within the last *three weeks* that the general public was told that the bad economy was “in your head”. Yeah? Well now it’s in yours too, buddy. I really get a kick out of how quickly the Rethugs took to blaming Clinton, since they never saw anything coming and had no power whatever in the last eight years.

    Again, screw ‘em all.

  6. Just heard on the radio a European bank has been bailed by the French, Belgium and Dutch governments.  The head of the bank THEN RESIGNED, and urged people to work together to solve the crisis.  Really, what sort of CEO is he. Surely he should be clinging on for dear life, shouting “it wasn’t my fault, just help me out”

  7. I heard the similar thing on NPR this morning about what this all boils down to. I keep hearing that from all kinds of financial people we need to pump in some money. I just hope the right decisions are made and the final choice is thought through. Yes, naive…

  8. Let me add to that greed thought that was explained to you. I also believe corporate and personal greed is both contributing factors, however; I also believe that HEDGE funds are another silent monster not being mentioned here…they are practically unregulated slush funds for anyone who has $500,000.00 to get in on.
    Also the government is buying up “bad” loans from the banks, why can’t they buy “good” loans too. Furthermore, they keep saying they need to “free up” credit lines for the banks and small businesses.
    Wasn’t it credit that got us into this mess? Does this not seem akin to treating heroin addiction with oxycontin?? If we free up “credit lines” with this corporate welfare program(bailout) what assurances do we even have that banks will follow suit and issue “loans” to people who “need” them???
    Am I wrong? Someone please inform me.

  9. The Emperor has no clothes. In this case, the Emperor has no money. FDR abolished the gold standard in 1932. Congress abolished the silver certificate in 1963. Read the Constitution: Congress shall have the power to . . . coin money and regulate the value thereof. Our economic system is built on confidence, not money. That’s why whatever bill is adopted must boost confidence. It has nothing whatever to do with money, in the traditional sense. Read, “Secrets of the Temple. How the Federal Reserve Runs the Country,” by William Greider. Andrew Jackson kicked out the Federal Bank, but has any one seen someone of his stature in the current political panorama?

  10. Leguru, there are good reasons not to link your currency (all too strictly) to a gold (or silver or melange-) based standard. You are betting the worth of your currency’s lifeblood against something which somebody may suddenly find a big motherload of in a new mine complex, or contrarywise, you
    might find your economy expanding while you DON’T find enough new deposits of the scarce stuff, thus choking off your money supply.

    Money, in the end, is a regulatory convenience for bartering the actual goods. As you noted, it’s built on confidence in that regulatory convenience. But that doesn’t mean it automatically has to be a fraud. Of course what the banks were doing was essentially multiplying the money that should have actually existed – and thus breaking that trust, while getting fat on the profit margins of lending thin air…

  11. Wasn’t it credit that got us into this mess? Does this not seem akin to treating heroin addiction with oxycontin?? If we free up “credit lines” with this corporate welfare program(bailout) what assurances do we even have that banks will follow suit and issue “loans” to people who “need” them???

    It’s more like treating someone who has an eating disorder, not a drug addict.  The idea of credit isn’t bad.  We do need it.  The problem is that way too much depends on it.  Right now, the way the economy functions is to keep as many people in debt as much as possible without them going bankrupt so that the most money flows out of them into the banking system.  That is incredibly stupid, but even in a perfect system, there will be some segment of the population always in debt.  What debt should be used for is emergencies and for buying a house and maybe a car.  The rest of the time you should be spending considerably less than what you bring in, and the system should be doing everything it can to help you do that.  That keeps your buying power up and confidence in the system so you are happy and able and willing to buy stuff, pay your mortgage and go to work.

    But of course banks won’t make nearly as much money and credit card companies would have to change the way they do business or be without business.

    But right now, everyone’s in trouble and the system desperately needs to have a shot of cash…. a lot of it.  The money should be placed carefully and be followed by some sensible legislation that will keep this problem from happening again.  What the bailout plan was is the money, which will help, but nothing else.  There was no consensus on how to spend it and no one’s thinking at all about how to keep this from happening again.  Without some thought in that direction, the people who will decide where the money goes are the people who are most at fault for creating this mess.  That doesn’t sound at all like a good thing, and this bill was not only going to give them a blank check, but then all of us were supposed to look away so we can’t even see where they were going to spend it or track it to make sure it wasn’t misused.  That doesn’t sound like a good thing either.

  12. What Ingolfson and Swordsbane said. The Catch-22 in this situation is

    There was no consensus on how to spend it and no one’s thinking at all about how to keep this from happening again.  Without some thought in that direction, the people who will decide where the money goes are the people who are most at fault for creating this mess.

    Once again, read “Secrets of the Temple. . .” Lots of Luck!  tongue wink

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