Staring Into The Economic Abyss

I don’t know about you, but I’ve been riveted to the news the last few weeks as we watch our economy self-destruct. If you’re going solely by anecdotal evidence, or by watching the stock market indexes, things might not seem all that bad. But, if you start digging into the subject in-depth, you begin to realize just how scary our nation’s current economic problems really are.

The United States, and now Europe and other parts of the world, is very close to seeing a total freeze of the credit market. This affected just banks at first, but is now spreading into “main street”, as politicians and the media have taken to calling the rest of economy. Already, some big corporations can’t borrow money to build new factories or to buy equipment. This includes GE and McDonalds – not exactly who you would consider high-risk companies. Without intervention, this is likely to spread even further to small businesses and individuals – even those with perfect credit.

Right now, nobody knows what a given bank’s mortgage-backed assets are worth – even the banks themselves. So, everyone distrusts everyone else and refuses to lend them money in the event they are a cesspool of worthless mortgages This is, fundamentally, what the economic rescue/bailout plan is intended to address. If banks can unload their uncertain assets, trust should be restored, and it’s much more likely other banks will lend to each other. In theory, this prevents the crisis from spreading into the larger economy.

I understand people’s strong opposition to using taxpayer money to buy up bank’s bad assets. It’s not our fault, and it doesn’t seem fair that we should have to pay for their mistakes. There have been many calls to simply let bankruptcy take its course and let let free market forces take care of the problem “naturally”, but as I told one of my friends last week: we are now well past that point. Failing to head-off this credit crisis would be catastrophic. Talk of real economic depression wouldn’t be out of the question. Everyone needs to understand that.

The revised plan that was passed by both chambers of Congress and by the President last Friday is far from perfect, but it’s a start. I have no doubt that it will be revised and adapted as the conditions change. And while there’s no question that $700 billion is an enormous amount of money, it’s far less than what our nation could lose if a financial apocalypse takes place.

If you’re interested in learning more about what are likely the most important events since at least September 11th, 2001, I’ve got a couple of good places to start. First, check out last weekend’s episode of This American Life: Another Frightening Show About the Economy. If you read/listen/watch to only one thing on this crisis, please listen to this. It’s embedded below for those visiting my blog, but you can also listen to it on their site or on your iPod. I also recommend an episode from earlier this year (The Giant Pool of Money), that gives one of the best descriptions of the housing bubble I’ve ever heard.

In addition, the New York Times has a special series on the financial crisis called The Reckoning that explores the causes of the current mess.

Even if business, finance, or economics isn’t your thing, this crisis is too big and too important to ignore.