Trying to Understand the U.S. Economic Crisis

A scary characteristic of the economic calamity facing the United States is that very few people, including myself, fully understand the causes of the credit crisis and nobody, even Econ. PhD. Ben Bernacke, knows how to solve problem.

It's difficult to fight a disease that you can't identify. I'll draw a crude medical comparison to the current pre-recessional period. Imagine that you are feeling ill, very ill. You know that your problem needs medical attention but when you go to see a specialist, she can't identify what is wrong. Now, here is where the comparison gets tricky. Instead of prescribing a progressive, homeopathic cure to attempt to improve your lifestyle, the specialist injects you with adrenaline (stimulus checks). Then, when that doesn't work, the specialist spends exorbitant amounts of money to prevent the disease from progressing rather than treating the root causes of the disease (Bernacke-Paulson bailout plan).

This analogy, I believe, more or less accurately reflects the U.S. government's response to the credit crisis. Rather than allowing toxic parts of the U.S. economy to painfully fail, the government is attempting an exorbitant bailout that will use huge amounts of cash to maintain the solvency of a bloated and sick system. Not that I am in any way a disciple of Milton Friedman, but what happened to the Wall Street motto of "Let the markets work." To me, it seems that Wall Street's creed should be changed to "Let the Markets work...when they are working for us." When there is a crisis, Wall Street wants a governement bailout just like a person who has just been fired from their job.

Of course, those with money and power do not want a recession or even perhaps a depression, and neither in the short run, do most of us. In the short run, a depression will be painful. However, in the long run, is a depression necessary to bring about some of the progressive changes that are necessary to move the society of the United States into the next century? After the last depression, FDR responded with a host of federal programs that helped build the foundation of the U.S. in the second half of the 20th century. If a depression helps the government focus on issues like health care rather than defense spending and rids the U.S. of irresponsible financial speculation maybe a couple years of pain is necessary.

If we put a Marxist spin on this whole ordeal (just for fun), it is pretty easy to see why the government is so frantic to push their $700,000,000,000 bailout plan through. To simplify one of Marx’s general suppositions, political institutions (superstructure) are an extension/reflection of economic power/capital (base). The partial collapse of the U.S. financial system, which would have already occurred without the intervention of the U.S. government on the behalf of the nation’s large capital holders (there is a nice counterfactual for you to chew on), would have profound effects on the nation’s political structure. That is, a drastic reduction and then alteration in the way capital is organized in this country would have a significant reverberation in the politics of the country…we might see the collapse or splintering of a party OR TWO. So, the government is not only working to bail out capital, but itself as well.

What can we take away from this rant? Not much really. Economics is a frightening beast. That's why I study Politics. Not to stereotype economists as a whole, but, in general, to get a PhD. in Econ. you need to have the mind of John Nash and the heart of Gargamel. So take that for what you will.