Quote of the Day

People: this is NOT Socialism. Go look up what socialism means.

This is failing companies unable to continue operating because they cannot get short-term loans. They cannot get short-term loans because those organizations handing out the loans have stopped, because the valuation of... well, of just about *everything* is suspect. Financial institutions are unwilling or unable to lend because their assets have shrunk relative to their debt and their (risky, overvalued) extant investments.

What do you do if your roof falls in and you need $100,000 to repair it immediately, but you only have $10,000 in the bank? You take out a home equity loan. You get access to enough cash to get the repairs done, and the bank gets a share of the equity in your house as collateral.

The terms are different, but banks are basically getting access to quick cash in exchange for giving the government a claim on some of their equity. Their ratio of debt to assets goes down, they are able to cover some of the risk involved in giving credit, and so they do... and then businesses can get short-term loans again, people can get car loans and mortgages again, etc. American consumers do what they do best, and in a year or two the economy is healed. Then the government divests itself of the aforementioned equity, and uses the proceeds to pay down the trillion dollars of debt it took on to buy it in the first place. Capitalism goes on its merry way.

That is NOT Socialism. Socialism involves the belief that the central government should own and control X industry, permanently.

DISCLAIMER: the above description of our economic crisis is not by an economist, and not intended to be accurate. It's just a layman's portrayal, quick and dirty, to help explain why America is not and will not veer into Socialism, so the paranoid right-wing buts can take a deep breath and chill the heck out.

Posted by: sdrubbins at October 14, 2008 3:59 PM

And, to MM: you're mostly, but not completely right that this is a cyclical correction. Things aren't perfectly cyclical, or the DOW never would have hit $14,000 to begin with. The economy can and does grow over time; we're not just bouncing up and down between set boundaries.

However, what you hit on, which the financial pundits seem not to have realized, is that this is a CORRECTION. It's one problem with all the bailout plans: everybody thinks we need to use the government to inject money and liquidity into the economy, so that there will be as much credit to go around as before, so that investments will reach their prior valuations, etc. But that's problematic.

Fact is, there was TOO MUCH credit sloshing around last year, too much cheap money, too many leveraged investments that were too easy to leverage. That's why real estate prices skyrocketed all over the country. RE just one example, but let's consider it: say the Feds inject more lending ability into the mortgage industry, allowing banks to lower rates, allowing people to afford more, increasing demand, pushing prices up, etc until we're back in the same situation that just bit us on the backside.

The same principle applies to the rest of the financial industry: we don't want our whole economy to grind to a halt, but at the same time we don't want to pour so much money into the pot that we go right back to where we were, only with even more foreign debt. By rights, we *should* go into a long recession. This economy needs to correct, not be propped up by taxpayer largesse. (Can we please pay for no more weekend retreats costing multiple times my annual salary for the misfeasant executives who got us into this mess??)

Posted by: sdrubbins at October 14, 2008 4:33 PM

Sorry, that was supposed to be paranoid right-wing "nuts," not "buts."

And while I'm here, another way to think of this is to consider the "tragedy of the commons." In a nutshell:

There's a small village, with 50 residents, which is shaded by 50 trees. Everyone enjoys the trees and the shade they provide for the whole village. One day, for whatever reason, the trees take one some specific value above and apart from the general value of their shade. Say a foreigner comes in and asks to purchase the sap of the trees, which is valuable where he comes from.

Who gets to sell the sap? This is not a hippie commune, there's money to be made here. The village residents start claiming trees as their own. They each take a tree and sell the sap. Some sell their tree to others, who then sell twice the sap, etc. Welcome to private property, and to capitalism.

But what if there's a drought, and the sap all dries up? The trees become valueless again. One successful entrepeneur owns ten whole trees, but what good are they to him? Why shouldn't the trees be "de-privatized?" Let them go back to being a communal resource until such time that they regain their sap and their value. Then, privatize them all over again!

The problem with socialism is it doesn't allow privatization when it's supposed to happen. As long as we do, then we don't have to worry about the government taking equity stakes in financial companies. (...not that aspect of it, anyway.)

Posted by: sdrubbins at October 14, 2008 5:17 PM