Scattered observations on the Crash of 2008
Last week’s spectacular market action has set the cat down among the pigeons, has it not? Politicians and commentators of every stripe are running hither and yon, desperately searching out a coherent narrative—any coherent narrative, be it truth or fantasy—to blame an opposing party for last week’s market crash. Well, there shall indeed be blame to assign, and, indeed, in the end we ought properly to assign it; but before blame must come analysis, and before analysis must come understanding, and before understanding must come observation. It is time to observe.
This writer does not sense immediate financial catastrophe. The Crash of 2008 appears, first and foremost, to be a liquidity crisis. For better or for worse (probably for better), the Fed is providing the needed liquidity. If so, then the crisis will pass.
Congressmen should vote down all bailout bills they do not understand, and should especially vote down the $ 700 billion bill rushing to the House floor this week. Now, admittedly, some might misjudge such advice to vote down the bailout to conflict with the previous point regarding liquidity; but you and I should not commit the error of comparing the Crash of 2008, a paper crisis, to a physical crisis like an invasion or flood. The Crash of 2008 is a serious matter, indeed, but it is not that sort of matter. The hard assets the furious scraps of Wall Street paper in question refer to will still be right there three months from now; they are not going anywhere, even when the papers are aflame. Ignoring greedy cries of panic from Wall Street, Congress can afford to take the time to solve this problem right.
For, if Congress panics and solves this problem wrong, Congress could create thereby a crisis much broader than the one we already face.
Partly changing the subject: if you do not currently own a home but can afford one, then right now would seem to be an outstandingly good time to buy. Now is no time to get fancy (if there ever was such a time), but do consider buying as much home as you do need. Market crashes tend to panic sellers and to freeze competing buyers, so offer now and offer low. This writer owns no crystal ball, of course, but housing inventories though dropping remain flush, prices are down, and banks are lending today to qualified borrowers at 6 percent. Present market conditions are nothing if not unique. If this is not the moment you have been waiting for, then what moment would be?
Last week’s events present The Economic Nationalist a gilded opportunity to make a fool of itself by premature interpretation. The Economic Nationalist declines the opportunity. The present crisis is not obviously closely connected with the blog’s chief economic concern, America’s trade deficit (even though the crisis could conceivably snowball into a larger crisis that did involve the trade deficit). Therefore, other than suggesting that you buy a house now to the extent that you need one and can afford one, we shall watch and wait for the time being. There will be no rush to judgment here.
HJH
[P.S. It is well to note that Mitt Romney, who almost certainly understands the mechanics of the Crash of 2008 better than most politicians and commentators do, appears to have offered little or no public comment on it. I think that it is safe to assume that Mr. Romney has not lacked for media invitations to express his opinion. Evidently, he has turned such invitations down. If Mr. Romney remains silent for the moment, then maybe you and I should heed his implied warning against premature interpretation. —HJH—]
[Update, Thursday, Sept. 25: Some pretty convincing arguments have been advanced by smart, experienced people in favor of the $ 700 billion bailout bill. The bailout really might be a good idea, it really might actually make money for the U.S. treasury, and this writer feels considerable sympathy for the Keynesian reasons underlying it, but were this writer a member of Congress he would nonetheless vote against the bill. To bet $ 700 billion of the taxpayer’s money in a panic on an unproven financial theory simply is not the kind of thing conservatives do. Fed chairman Ben Bernanke and Treaury secretary Hank Paulson are smart, capable men, but if they were smart and capable enough to price and to manage this unprecedented bailout, then—are we not entitled to ask—would they not have foreseen the crash before it occurred? Sorry, regrettably, no deal.
[The kind of manipulative thinking that justifies the bailout closely resembles the kind of manipulative thinking that got us into this mess in the first place. Put simply, if we had handled our money more soberly all these years, then no bailout today would be needed. Admittedly, this may be irrelevant—manipulation may actually be called for in the present emergency—but this writer does not trust the motion enough to back the manipulation so soon, if ever.
[By the way, a private e-mail has asked why this writer does not think the market crash trade-related. Answer: it may be trade-related, in the sense that it is so big that it relates to just about everything; but it does not appear to be primarily related to our trade deficit. It is tempting for any economic nationalist today to cry, “I told you so,” but the facts of this crash simply do not seem to fit our preferred theory. If Treasury yields—the interest rate at which the government can borrow money from private citizens and from abroad—should climb sharply, then this writer would reconsider, but far from climbing sharply they have dropped to practically nothing in the short term. People seem to feel that the U.S. dollar is a good bet, which means that they expect to be able to buy something of worth with the dollar later. If anything, fortunately, the crisis seems to suggest that the dollar’s unique status as the world’s reserve currency is not yet endangered by our unfavorable balance of trade. If so, then this is a very good thing; though, admittedly, in the present, unprecendented situation, there may yet exist some salient factor that this writer continues to overlook. —HJH—]
September 24th, 2008 at 4:11 pm
$700 billion is a lot of my money. No way. It’s socialism. The people who made the decisions and took the risks in the hope of big profits can now take the losses. That’s American.
Howard, if even this crash does not have to do with the trade deficit, then is the trade deficit really as big a threat as you have claimed?
September 25th, 2008 at 9:16 am
Thanks for the question, Mark. See the update above.
By way of analogy, imagine a fellow who dashed afoot daily across a busy freeway to hurry to work. You might warn him that, sooner or later, the practice would get him run over. Now suppose that the same fellow got mauled one day by a bad dog that had escaped from the leash. When you visit him in the hospital, he grins and says, “See? I told you that dashing across the freeway was not dangerous.”
In my view, it’s like that. The United States cannot expect to consume more than she produces in perpetuity; and, separately, undue dependence upon foreigners for things Americans can and should make for themselves is dangerous, as this blog has argued many times.
You are right about the $ 700 billion, though.