I'm writing to add my voice to the many talking about the financial crisis. First, let me tell you that I am a grad student in economics. I say this for two reasons: 1) though I don't understand everything going on, I probably understand more about it than the average person, and 2) as a grad student, I'm relatively poor and therefore don't have ulterior motives. The latter point seems to matter here as some have accused anyone in favor of the bailout as having a financial motive for our view.
I understand that we've been burned as a nation by an administration that is quick to claim that Armageddon is just around the corner. However, this IS a very serious problem. There is one thing that we need to get straight: if congress does nothing, everyone will suffer. While I doubt the economy will get as bad as the Great Depression, there is a fair chance that it will be the worst downturn since that era. It may not happen tomorrow, but the more we wait, the greater the chance of a meltdown. Also, understand that the small recovery in stock prices today is based on optimism that congress will pass something.
More after the fold...
There was a diary yesterday explaining the situation, but I'm going to take it from a different approach. Remember the scene in "It's a Wonderful Life," where there's a run on the bank, and George Bailey tells the clients that he can't give back the money b/c it's been used to buy houses for other townspeople?
Now imagine if people took their money out anyway. No more mortgages. No more car loans. No more small business loans. This is what is happening right now, except is wasn't caused by a run on banks. Banks gave out mortgages for more than the value of homes (plenty of blame to go around for that). If people don't pay off the loans, the banks will get the property, which is less than the money they gave out. They have to just write off the loss. The money you put into your savings accounts, that banks normally use to give out loans, is GONE. It was used to give mortgages that should never have been given.
So, now what do we do? Well, we can continue to blame the people that got us into this mess and laugh at how they try to blame us. We can punish Wall Street and by doing so, punish "Main Street" in the process... Or we can support some sort of bailout plan. The bill that failed was certainly flawed. I would love to see a version that puts less power in Paulson's hands, and would give more equity to taxpayers, but I would have settled for the bill that failed. Here's why: the bill is not meant to be a solution. After we avert disaster, we need to step back and address the problems that got us here. I think President Obama, w/ support from a more Democratic congress can do that. This is what you should be focussing on when you contact your reps. Keep the pressure on them so that we don't keep getting into these messes. The deregulation that started w/ Reagan but continued through several other administrations needs to be reversed. However, that's not what the bailout is about. The bailout is meant to get capital to flow again.
I understand the philosophy that government shouldn't be responsible for bailing out Wall Street's mess. I don't agree w/ it, but I understand. However, I want all of those w/ this position to understand that it will be VERY bad for the economy.