I have been reading/hearing how the current economic crisis is akin to a “War,” and that it is important for politicians and citizens to follow the lead of the President as if we had been attacked, similar to 9-11 or even Pearl Harbor. And so, we should all get behind the President and work together to defeat the threat that we face.

This premise is so bizarre that I find it difficult to even decide where to begin. My synapses fire in a rebellion of thought that I have to pause to review what they are telling me, since this premise is flawed in so many ways, you may as well tell me that the Soviet Union has decided to re-invade Afghanistan and are in pitched battles with U.S. forces who are on the verge of actually capturing Osama Bin Laden.

The crisis has unfolded rather chronologically, so I’ll try to arrange my thoughts based on the chronology of events as I recall them.

Back when Lehman Brothers failed, and no government bailout saved them (when we didn’t even know who our next President was going to be), the first stimulus package was passed. Even then there were those that made the claim that we were “on the brink,” or “looking into the abyss” or an equally tired alarmist phrase regarding the banking and market system that we have in place. From what I can tell, the fact was that banks were unwilling to lend to each other because with the collapse of Lehman Brothers bankers finally realized that if they made bad loans, they might not be repaid, because the entity they made a loan to might actually go bankrupt. And banks feared this primarily because they knew that there were such large off balance sheet transactions that had been hidden, and no one knew who was holding the hot potatoes. And so, the markets would freeze up, and payroll checks would stop, stock prices would plunge since no one would be willing to buy stocks, cats and dogs would be living together, and the antichrist would lead his armies throughout the land, laying waste to the countryside and forcing folks to write bad checks.

In order to avert this “Armageddon,” apparently our high priest of the Church of The Federal Reserve spoke to the politicians and told them “Oh ye of little economic understanding, listen unto me, and give unto me the wealth of your nation so I may avert the end of times.” Apparently Bernanke had not seen the Austin Powers series of movies, or he would likely have asked for the even One Trillion Dollars while holding his right pinky up to his lip. Of course, now it looks like we would have gotten off cheap if he had gotten the One Trillion Dollars and the problem did go away.

Politicians did move with speed befitting a war/attack type of event though. While there was one aborted attempt to pass a bailout (and note that while that news did indeed cause a market downturn, somehow the world muddled through to the next vote on the bailout). Back in
September of '08, Secretary of the Treasury and Federal Reserve Chariman Ben Bernanke asked for 700 Billion dollars Bush is quoted as having said, "Every American should know that the federal government continues to enforce laws and regulations protecting your money." When I read that, I ask, "What about the bankruptcy laws?"

Paulson is quoted as having said:

"I am convinced that this bold approach will cost American families far less than the alternative _ a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson. "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."

<http://www.huffingtonpost.com/2008/09/20/bush-asking-for-700-billi_n_127926.html>


That seems to be the extent of the explanation given of the danger that we faced/are facing. Let's try to make sense of this statement:

"A continuing series of financial institution failures" Okay, banks would fail, and the FDIC would have to pony up cash to make sure that people got their money. There is no clear perception of how many banks would fail though.

"Frozen credit markets unable to fund economic expansion." With so many banks failing, no one would be willing to loan money, forcing a lot of companies to minimize expansion plans, and those companies without reserves would fail because they would not be able to secure financing.

At the same time, Paulson did not want to increase federal regulation of industries. I'm not sure if that was because he felt that more legislation was useless, and that what we needed was stronger enforcement of existing legislation, or if he is trying to stick with a more libertarian or laissez faire view of how markets should operate. I would expect that a libertarian approach would really mean that he would want further legislation for transparency in reporting. But since I have heard of little being made of a drive to increase enforcement capability for finance, I have to say that a Laissez Faire approach is exactly what got us into the mess.

Still, the call to arms was made, and the enemy was both "Fear itself," and some sort of vague problem with the financial markets that the gurus of finance would be able to fix. And at that point, they were talking about a buyback of the so-called toxic assets" that were held by financial institutions. So, the war began. We knew who/what the enemy was (toxic assets) and what we were going to do to deal with it (have the government buy them up).