There are only five things of significance about the Emergency Economic Stabilization Act of 2008 (EESA), in my opinion (although we do not yet have the final version):
- Drafted in haste, it will have many and serious unintended consequences.
- Its provisions are largely irrelevant to our economic problems, intended to treat the symptoms.
- Our leaders have no “plan B”; this is a “hail Mary” pass.
- The economic impact will be minor, or even less than minor.
- The next program (EESA-2009?), taken by the new Administration after another 4+ months of weakening, will be the first important response to this crisis.
The government’s responses so far to this crisis are like beads on a string; each larger than the one before it — but all broadly similar.
- Government approval for fraudulent accounting, to hide the extent of the problem (Section 128, suspending market pricing of assets).
- Happy talk — do you remember the Treasury’s Hope Now alliance, in October 2007?
- Cheap financing and bailouts for injured financial institutions.
The goal of this plan — assuming that there is in fact a plan behind this, and not just ad hoc grasping at straws — is probably to buy time for the economy’s natural mechanisms to work. Unfortunately this misunderstands the key aspects of our situation:
- The scale of the problem, the post-WWII debt supercycle, and
- Time is our enemy, as the global economy slows and the US economy slides into what looks like a severe recession.
- A sufficiently large solution requires an agreement with our foreign creditors.
The last is the key to understanding our government’s actions. They do not want to open such negotiations, hence can take only small actions buttressed by “Rube Goldberg” financial machinations. We cannot pay our current debts and need sums far larger than our currently massive borrowing. This requires an agreement with our creditors to do the following:
- extend the maturity of our current loans, rather than just rolling them over and over,
- provide large loans to fund both our current account deficit (running at 4-5% of GDP) and the needed restructuring costs (this and the next EESA, plus large fiscal deficit during the recession),
- provided at low interest rates (or eventual payment becomes impossible),
- with the first payments due in 3 – 5 years.
This will end our pretensions to be a global hegemon. Plus, our creditors will want concessions. For example, China will want a sphere of influence that includes Taiwan.
Precedents in US History
America has had four major financial events. The government successful responded twice, and failed twice.
(1) Alexander Hamilton convinced the Founders to honor the revolutionary war debts, and successful arranged the means to do so.
(2) FDR’s New Deal mitigated the effects of the Great Depression, but failed to end it. His solution was to end gold convertibility for US citizens, and greatly expand both government spending and regulation. After a bounce, the economy slid back down in 1938. The Depression was ended by WWII.
(3) Johnson’s “guns and butter” over-spending resulted in collapse of the Bretton Woods system. Nixon’s solution was to end gold convertibility for other nations, and increase government regulation and spending. Some examples: price controls, affirmative action (the Philadelphia Plan), the Environmental Protection Agency (EPA) and Occupational Safety and Health Administration (OSHA). He proposed, but the Democratic Congress refused to approve, national health care and a national minimum income (the Family Assistance Plan). These measures stabilized the economy for a few years, although at the cost of rising inflation — leading to the next crisis.
(4) Fed Chairman Volcker plus Presidents Carter and Reagan responded to the accelerating decline of the US economy by forced restructuring (high rates, the 1980-82 recession) plus far-reaching deregulation. This resulted in a quarter-century of economic growth with decreasing inflation.
The fifth crisis
This forms a break with previous US history, as we cannot solve it alone. Years of insane financial management have left us
- addicted to foreign borrowing, which we cannot suddenly stop without severe withdrawal pains, and
- over-indebted, unable to resolve our problems without foreign assistance.
Leaders with steady hands and clear minds can steer us out of this storm. Our job is to elect the right people and support their actions (including criticism where deserved). Prayer might also help.
For a brief analysis of this bill, see “The Bailout Compromise“, David Zaring, The Conglomerate, 28 September 2008
What should we do?
That is a complex question. For a simple answer see A solution to our financial crisis.
If you are new to this site, please glance at the archives below. You may find answers to your questions in these.
Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
Some FM posts about the current crisis
Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
Say good-bye to the old America. Welcome to our new socialist paradise!, 17 September 2008
Another voice warning about the nationalization of AIG, 18 September 2008
A vital but widely misunderstood aspect of our financial crisis, 18 September 2008
A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
Another step away from our Constitutional system, with applause, 19 September 2008
What do we know about the financial crisis? What are the key questions?, 20 September 2008
Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
America appoints a Magister Populi to deal with the financial crisis, 21 September 2008
Legal experts discuss if the Paulson Plan is legal, 21 September 2008
Essential steps to surviving the current crisis, 23 September 2008
How should we respond to the crisis?, 24 September 2008
A solution to our financial crisis, 25 September 2008
Is the US economy in good shape, or in terrible shape?, 27 September 2008
For a full listing see the FM reference page about the Financial crisis – what’s happening? how will this end?.
A few of the most important posts warning about this crisis
This crisis has long been forecast by many, including in articles on this site. Even now that we are in the whirlwind, these provide valuable background material on its causes — and speculation about the results. To see the all posts on this subject, go to the FM reference page about The End of the Post-WWII Geopolitical Regime. Here are some of those posts.
A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
We have been warned. Death of the post-WWII geopolitical regime, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession?, 18 March 208 — The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
The most important story in this week’s newspapers , 22 May 2008 — How solvent is the US government? They report the facts to us every year.
The World’s biggest mess, 22 August 2008 — A brillant ex pat looks at America from across the ocean.
“The changing balance of global financial power”, by Brad Setser, 22 August 2008
“The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008