An earlier version of this was posted as a comment on Rep. Udall's dissent from the 700 billion dollar bailout. I thought it was worth posting as a separate diary, in view of the importance of the subject.
Economics is simple: supply and demand are constantly trying to stay in balance with each other. Economics is totally honest, like algebra. It's the political manipulations of it that complicate things.
The applicability to the present situation is this:
There is a limited amount of credit in the nature of things. When the government borrows massive amounts of money to finance things like the Iraq occupation, it competes with homeowners and others with a legitimate need to borrow, raising their cost of borrowing and potentially driving them into default.
Further, the government's borrowing (essentially from foreign banks) reduces the overall value of the U.S. economy, thereby reducing the value of the dollar. This makes U.S. exports slightly more competitive, because U.S. wages are falling, but disadvantages the U.S. economy and U.S. residents in every other way. It's a quiet form of impoverishment that nobody notices, making it politically acceptable. Republicans can keep blathering about cutting taxes because the major tax is concealed in the declining value of the dollar.
The 700 billion dollar bailout is essentially about image: to show we mean business. Unfortunately, it aggravates the disease it is supposed to cure. It's like the anti-tuberculosis cigarettes marketed in the 1800s.
The famous Depression-era economist John Maynard Keynes advocated deficit spending to "prime the pump" of the economy. He meant a modest amount of deficit spending. He did not have in mind the massive deficits the U.S. government has been running under the Bush administration.
To restore fiscal health to our economy, the government needs to spend less. 700 billion more in spending is all about image, not reality. It's a bluff and a gamble that the bluff will be taken seriously. If the gamble fails, and world markets notice it's a bluff, the money will simply have been poured down the tubes. 700 billion dollars is a lot to stake on a bluff.
Right now, the country is undergoing a tremendous reality check. You can only lie to yourself and others for so long before the consequences start pouring in.
The remedy is simple: spend less; require transparency at every level of our financial system, from the formulation of complex derivatives to the offering of loans, in other words: economy and the rule of law. Unfortunately, a lot of fat is going to sizzle in the fire before we awake to these simple lessons.
The one question that everybody should be posing to the Presidential candidates, and to our much-maligned Congressional representatives who have staged a rebellion, is: "What are you going to do to reign in spending?" If they have time, there is another question worth asking: "What are you going to do to restore transparency to our financial system?" Everything else is smoke and mirrors.
Economics, like mathematics, is merciless, so eventually reality will bite back: through a continuing financial shakeout in spite of the bailout, through a worsened decline in the dollar, or through any of the many means reality has at its disposal to correct those who ignore it.
If we must have a bailout, then let's make it a 70 billion dollar bailout, not a 700 billion dollar one. That's enough to satisfy image, and will leave our economy somewhat more intact.
Remember: Economics is simple. Distrust anybody who tells you different.