At The Weekly Standard, Bill Kristol has economists he respects, neither “alarmist by nature,” who are increasingly concerned as they see two massive dominoes about ready to fall.
I’ve received phone calls in the last hour from two economists I respect, one of them Larry Lindsey, the other in a position where he’d prefer not to be named. Both have government experience, neither is alarmist by nature, and they say this:
The huge European bank Fortis is apparently about to fail. The ripple effect on the American banking system could be disastrous, with bank runs, liquidity crises, and stock sell offs possible Monday. Wachovia may well fail next week. As Larry put it, this really will be 1933 soon if we don’t move rapidly to stabilize the banking system.
And here’s the bad news: the current bailout bill, whatever its merits and likelihood of passage, does nothing to address this.
He suggests “simple legislation by Monday” to provide unlimited deposit insurance as well as Federal money market guarantees to stave off panic while Congress continues to fight over a central solution.
We are witnessing a failure in government. Our Congress cannot work together to provide an immediate fix to a problem it created in the first place: forcing the American financial sector to extend mortgages to those who were high risk borrowers in order to champion to the American people that more minorities own homes than ever. That worked well under a booming economy. But when the natural cycle of economics turned downward, fear dismissed became reality unavoidable. The house of cards came tumbling down.
And even still, amid all the haggling and fighting going on in Congress over how to shore up the financial cash crisis, not a word is mentioned about changing the counter-intuitive practices forced upon mortgage lenders in the first place. In this respect, it’s not unlike how Congress and the White House chose to address illegal immigration: by trying to deal with those already here first rather than initially addressing the cause: the influx of illegals that continues to flow unabated.
Make no mistake, if we wake to Black Monday this week, the responsibility lies squarely upon Congress and the electorate which has put them there, not our banks. Our banks’ hands were forced by mandates from Washington, not their boardrooms.
And here we are. With a Congress so polarized that they are incapable of working together.
And let’s not be confused about the situation, either. They may be worlds apart, the Democrats and Republicans. But it can hardly be said that the Republican party has become radically right. But one look at Nancy Pelosi and Harry Reid – to say nothing of their nominee for President – the Democratic party in both Houses of Congress have become radically left. Over the past two decades, the conservatism of the Republican party has held steady (at best) while the liberalism of the Democrat party has sprinted to the edge. And it has been Democratic policies during that time – directing Fanny Mae and Freddy Mac by legislative mandate – at the core of this entire financial crisis.
America does not seem nearly as polarized as its elected representation. But perhaps in less than one full week, it really won’t matter but for hindsight and lessons going forward. Hard, painful, demanding lessons.