I'm Binah, and I approved this posting

It's a shame, but I have reached the point of no longer having the time to blog as I once did -- life has too many other demands at this point. So I'm quitting the blogging life, perhaps for good, perhaps just for a time.

I don't need to expand much on the depressing political developments probably coming our way -- a large step backwards to about 30 or 40 years ago -- in the form of Barack Obama, his movement, and the flunky journalist class that surrounds and protects him. Falsely sold as an agent of change, Obama in reality is the politics of Boomer nostalgia made flesh and dwelling among us, as well as a false messiah of the panicked establishment now filling his campaign coffers. It's older voters and older Boomers who are his core supporters. He's not the future, but very much the past, nicely scripted and teleprompted.

There will be no more seemingly limitless easy credit from our Asian lenders after the current financial crisis ends. Once discredited, nostalgia-filled "progressive" politics is likely to turn into nasty or even violent reaction. Constitutional and democratic government will be under exceptional stress, with suppression of dissent and free speech very likely. With its voter fraud schemes and bullying of local radio and television stations, the Obama campaign is a foretaste.

Somewhere between cult and hoax, an Obama presidency will probably be one term only. But don't get your hopes up too fast. An enfeebled GOP will take at least a decade to rebuilt an effective opposition, and we don't have a decade to respond to the crisis brought on by a vast credit bubble and a decade and a half of overborrowing. The coming breakdown of the welfare state will only add more woe. The problems created by too much debt cannot be solved by more borrowing. Politicians' new false promises can't undo the damage done by past false promises.

Political opposition is likely to take more bizarre forms. Backward steps in tax and other policies will undoubtedly make the US an even more hostile place than it already is for businesses that produce goods and services -- as opposed to financial institutions and politicians that encourage Americans to pile on more debt to buy from elsewhere. The dollar's long period as the world's main reserve currency enabled much of this excess. Expect the dollar to lose much or all of this status. The terms of borrowing from foreigners will become much tougher.

If we had a free press in America -- ah, but we don't. (See here and here, curiously, both by Democrats.) What we have instead is a class of would-be courtiers and lackeys, all primping themselves to serve as Obamamerica's unpaid Ministry of Popular Enlightenment. The conventional media is a junk-food banquet in which most of the dishes are poisoned. The best thing you can do is the simplest: turn it off. Conservatives, libertarians, and independents need to abandon the media-driven populist posturing that has displaced their older political wisdom in the last 15 years. The conservative movement so successful in the 1970s, 80s, and 90s was a movement of personal experience, thought, conversation, and books, not a movement of televised talking heads, Washington cocktail parties, and pandering.

This is Binah, signing off, till who knows when. To quote a journalist from a different era, when America actually had reporters, good night and good luck. Let's hope the night doesn't last longer than it needs to.



POSTSCRIPT: How could I forget "blogal warming"? :) Good news to report: more and more scientists are publicly rejecting the idea, as the negative evidence keeps piling up. Don't ignore your personal experience: the last two years really have been colder. The polar regions, especially the Antarctic, are cooling. The connection to the Sun's weakening magnetism can no longer be disputed, even if it is not yet understood.

It's refreshing to see scientists responding to evidence and ignoring mistaken computer models. If only Wall Street had taken this to heart earlier ....

Our sins and our debts ...

... are often more than we know, or so runs an old English proverb.

Linking to a post by Fabius Maximus, I recently pointed out the heavy level of societal indebtedness in America, especially household and consumer debt. The developing economic downturn will probably be an international episode, lasting part or all of a decade, like what Japan went through in the 1990s, the so-called "Lost Decade." (The recession proper might be short, but not the subsequent stagnation.) Post-bubble, the name of the game is deleveraging, working off debt, renegotiating debt, and (in some cases) defaulting on debt. The need to undo some of this indebtedness (the dead hand of the past) will put a definite crimp in everyone's style for at least a while, now and in the future.

The so-called "credit crisis" we've just passed through isn't really a "credit" crisis so much as a "creditworthiness crisis". If you have good credit and can prove it, you can borrow, even though the terms will be tougher. What has lending markets paralyzed is distrust of borrowers in unknown financial condition. Many are fine, some are struggling, and some are bankrupt. Helping bankrupt actors (banks, businesses, individuals) continue to borrow is a big mistake; it just prolongs the crisis and sends good money after bad. We have ways of dealing with bankruptcy, including deposit insurance for bankrupt banks. The right thing to do -- and what was done in the savings and loan crisis of the early 90s -- is to let the bankrupt go bankrupt, compensate depositors, collect and sell assets, and allow the non-bankrupt to prove their creditworthiness. Once everyone's financial state, both good and bad, is clarified, lenders will start lending again.

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Friends keep asking me if (especially if Obama wins) we'll get a new New Deal. The answer is no, we won't. The New Deal did not cure the Great Depression, but undoubtedly prolonged it. The world economy is far too interconnected to allow such economic experiments today: socialism requires, among other things, a closed economy and a fairly closed society. We're moving farther and farther away from conditions that made such maneuvers possible.

It is possible that reckless politicians could launch a trade war, fueled by demagoguery about globalization and alleged "deregulation." Investor concern about this, here and elsewhere, is one of the reasons for the big drops in stock exchanges worldwide in the last month. If it starts to develop, it must be stopped dead in its tracks. It would leave the world a less secure and poorer place, impacting the poorest countries the most.

But there are reasons closer to home why we won't be seeing a new New Deal, and that is that governments are no longer in the strong position vis-a-vis their economies the way they were in the 1930s. Western governments today are among the world's biggest debtors. Given the global economic integration we have now, inflating away the debt (by printing money) is not an option, and governments cannot raise taxes much, if at all. Both options would cause investors to flee and a much more serious credit crisis. The remaining possibilities are deflation (which I think we're definitely heading into in any case, central banks being unable to stop it) and a higher probability of government debt defaults. I don't think the US federal government is in that situation, but a number of states and municipalities are.

In a sentence: governments will not be counteracting private retrenchment; they will themselves be retrenching.

Deflation will bring some good things, the most important being the undermining of "commodity dictatorships" like Russia, Venezuela, and Iran. Commodity prices are sensitive barometers of demand. With demand slackening off, all such governments are and will remain in serious trouble.

Although I strongly doubt the conventional wisdom that the Democrats will gain in Congress -- given Congress' unpopularity, they're more likely to lose some seats in the House -- my recommendation is to sit back and let an Obama administration go about its wrecking work. Voters will quickly suffer a shattering disillusionment once the Candyman Messiah is discredited. The real question is whether an effective conservative movement can be rebuilt from the wreckage of the last ten years. What we're seeing now -- a Republican administration looking the other way in the face of government-enabled bad debt, effectively nationalizing banks, extending government credit far beyond anything ever conceived, and so on -- is what happens when you don't have a conservative party or effective conservative politicians.

Mysteries of financial risk, plus: House on fire

The idea floating around (one version proposed by McCain) that the government should buy up "troubled" mortgages is as misguided notion as they come. "Troubled" itself is hard to define. Is it determined by the borrowers' difficulties in making loan payments? Or by loan default? Or is it just a mortgage "under water," valued at more than the house it's attached to? "Troubled" should be limited to, at most, the first two cases.

The housing crisis -- or rather, the house financing crisis -- will have, not one, but many endings, covering a range of possibilities:

• Borrowers paying reliably on mortgages "under water"
• Borrowers with payment difficulties who renegotiate their loans (lower interest rate)
• Borrowers in default who might renegotiate or just move out, to rentals
• Borrowers in foreclosure who must move out, or stay and rent with option to buy

At this point, the last category is small, a little over a percent of mortgages. The range of options is enough to make simply throwing people out on the street an unnecessarily harsh choice. Banks and lenders will not want to sit on unoccupied, non-income-generating property in any case. Both lenders and borrowers will unavoidably take some losses along the way.

Except for directly intervening with borrowers with Fannie and Freddie loans, it's hard to see what role government should take here, except to act as a catalyst. Government should certainly not be engaged in perpetuating the housing bubble; for example, in trying to prop up house prices or encouraging any more subprime lending. If it does anything for the housing market, it should be terminating the ingredients that went into the bubble in the first place.

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The general financial crisis, centered in the credit markets and impacting others (like the stock market), was certainly triggered by the weakness in the subprime mortgage market and exacerbated by falling house prices across the board. But the financial system, as evolved over the last thirty years, has developed intrinsic weaknesses of its own that falling house prices merely exposed. Those dangers are embodied in excessive debt and rationalized in turn by faulty theories about controlling risk.

Many of the supposed culprits -- mortgage bonds and "derivative" securities (essentially, complex, composite repackagings of existing securities); the non-existent "deregulation" of Wall Street; and the alleged merging of investment and commercial banking -- are bogus. These supposed factors are either not real or not capable of producing an unforeseeable credit crisis of this magnitude.

Over the last generation or so, the financial world, American and non-American, the regulated and the regulators, has developed an unhealthy and misplaced confidence in its ability to quantify and manage risk. The crisis we see unfolding now has nothing in the slightest to do with "fraud" or malfeasance on any individual's part.* Traditional regulation is designed to deter and punish such misbehavior, which is multiply times over illegal anyway. A crisis of this type is a result of collective misjudgment and collectively-held false ideas about risk, mixed with a certain level of hubris.

Viewed this way, our present financial troubles start to look less like a crime caper and more like the failure of a complex technological system, like the explosion of the space shuttle Challenger or the sinking of the Titanic. Megan McArdle had an interesting post on this point a while back.

To follow Megan, it's especially enlightening to compare the failure of financial risk management with the Challenger explosion, on which topic she recounts the story in Richard Feynman's famous What Do You Care What Other People Think? and captured in detail in Feynman's appendix to the Rogers Commission report. The key comparison: the different ways that different people interpreted "small" risks. Based on decades of prior experience with rockets, the engineers knew in their bones that the "small" risk of a fatal shuttle accident was about one in a 100. (And we know now, with over 25 years of shuttle experience, that they were right.) But they couldn't articulate and defend their point of view in the face of managerial and political figures, whose notion of "small" was more like one in a 100,000 or one in a 1,000,000. Each near-fatal incident, instead of being interpreted correctly as a warning, was instead rosily misinterpreted as "great, we survived another close one" and falsely built up NASA's confidence.

That difference -- "small" as one in a 100 or one in a 1000, versus "small" as one in a million or ten million -- is precisely the difference between the "wild" and the "mild" in risk, "Extremistan" versus "Medocristan." Readers of previous posts on finance and statistics will know of Nassim Nicholas Taleb's The Black Swan and all about such misperception of risk. A one-in-a-hundred incident is something likely to happen more than once in a person's lifetime. A one-in-a-million or ten-million incident is unlikely to happen in anyone's.

It makes the crucial difference to social systems created and run by humans. All of us, especially the college-trained, are prone to the Tyranny of the Cookbook, falsely believing that some answer is better than no answer, even if that answer is wrong. Much of the financial world still wrongly assumes the mild risk of Medocristan and rationalizes the powerful evidence to the contrary by handwaving.
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* It has even less to do with "corruption," something outside of Wall Street's power, since that requires the granting of political favors. You have to look to K Street (in Washington) for that.

"Right-wing extremists"

The recent Austrian elections saw gains by far-right parties. The death of one of their leaders, Jörg Haider (at four times the legal alcohol limit, author of the carnage on the right), brings to mind an important debate in the blogosphere and elsewhere about the nature of Europe's anti-immigration and anti-Islamization parties.

Europe is facing some tough choices, too long put off, about its immigration policies and how they will impact Europe's political future. Will Europe's cities become Islamicized and start sprouting "countries within countries" -- a return to the medieval practice of fragmented sovereignty and theocratic legal systems? Consider that Britain has now endorsed shari'a courts for civil and personal status cases, with the full force of of the state behind them, and you'll see that it's no hypothetical question.

Liberal journalist and historian Ian Buruma has recently written about how important it is to listen to voters' concerns about such issues. Such questions and concerns are generally ignored by Europe's elites, leaving voters frustrated and prone to vote for fringe parties as a protest.

... to see the rise of the Austrian right as a revival of Nazism would be a mistake. For one thing, neither [far-right] party is advocating violence, even if some of their rhetoric might inspire it. For another, it seems to me that voters backing these ... parties may be motivated less by ideology than by anxieties and resentments that are felt in many European countries, including ones with no Nazi tradition, such as the Netherlands and Denmark.

In Denmark, the hard-right Danish People's Party is the third-largest party in the country, with 25 parliamentary seats. Dutch populists such as Rita Verdonk, or Geert Wilders, who is driven by a paranoid fear of "Islamization," are putting the traditional political elites -- a combination of liberals, social democrats and Christian democrats -- under severe pressure.

And this is precisely the point. The biggest resentment among supporters of the right-wing parties in Europe these days is reserved not so much for immigrants as for political elites that, in the opinion of many, have been governing for too long in cozy coalitions, which appear to exist chiefly to protect vested interests. In Austria, even liberals admit that an endless succession of social democrat and Christian democrat governments has clogged the arteries of the political system. It has been difficult for smaller parties to penetrate what is seen as a bastion of political privilege. The same is true in the Netherlands, which has been governed for decades by the same middle-of-the-road parties, led by benevolent but ... paternalistic figures whose views about multiculturalism, tolerance and Europe were, until recently, rarely challenged.

And opposition to such developments hardly makes one a "fascist." The European Left has worked tirelessly to vilify anyone who questions or objects to its project of civilizational suicide. For the most part, the media slavishly parrots this line.

Actually, European parties of the democratic Right are easy to identify and distinguish from fascist parties. The distinctive historical characteristics of fascism -- a closed society and economic system; extreme forms of chauvinism, bordering on racism; contempt for democratic politics and worship of violence and violent leaders -- are less relevant today than certain other hot-button issues.

The most obvious are antisemitism and attitudes toward Israel. Even more important is the question, how do the local Jewish community and Israeli embassy feel about the party in question? Answers to such questions are strongly correlated with deeper attitudes: What is the party's attitude toward political democracy? How does it feel about Islamification, as a social phenomenon? As a political-legal phenomenon? Specific questions better illuminate the issue: for example, are they hostile to the Bosnian Muslims persecuted by the Serbs? If so, what is the nature of their hostility?

An even easier way to make the distinction is to ask, which European figures of the recent past do they admire and mimic? Does the list include conservative, democratically-oriented figures like Churchill, De Gaulle, Adenauer, Thatcher, or the last Pope? Or is the list populated with names like Mussolini, Hitler, Antonescu, Milosevic, or Le Pen?

On a very relevant, hot-button issue, the far-right, quasi-Nazi parties of Europe have been quietly shifting toward support of radical Islam, in spite of their anti-immigrant rhetoric. Austria's Freedom Party, for example, is strongly opposed to the combined American-European attempt to stop Iran from getting nuclear weapons.

Asking the right questions and not fudging the answers are all that is needed to sort this issue out.

(Read this post from earlier this year about the Islamicization debate. See here and here for related posts from last year.)

House: Wonderful life to Boomer nightmare

Ross Duthat has an interesting piece in today's Washington Post about the origins of America's romantic obsession with home-owning. He picks an interesting culprit, one George Bailey -- yes, that one -- and traces the consequences in our tax code, public subsidies, zoning laws, transportation systems, and much else. Real estate is undoubtedly our true religion.

But I don't agree with his conclusions. He seems to think oil will remain at $140 a barrel, while the new deflation means oil will actually continue to drop in its dollar price -- it's already virtually half its peak price now. And there's no evidence that mass transit or other "new urbanism" is affordable or even desired by most Americans. (See here for California's breathtaking rail boondoggle, for which the state wants federal help and which it should absolutely not get.) And until the 1990s, the federal agencies for helping people buy houses (the VHA and FHA) did act in a conservative way. They were regular government agencies, founded by people who lived through the Depression and largely insulated from direct Congressional pressure, that also did not lobby Congress in turn -- very different from the quasi-private but government-backed patronage-graft extravaganzas of Fannie and Freddie.

What will result instead is probably a more sensible version of the automotive-suburban dream: more hybrid and other efficient cars (we had more efficient cars in the 80s!), smaller houses, and more compact development. Nor is so-called "sprawl" unique to America: it's increasingly common in other countries too, like France (see here). The "new urbanism" is largely a reactionary, elite fantasy.

The debt-based consumption excess of the last 15 years is really a generational tale, of Boomers and their kids gone wild. They treat what their parents and grandparents viewed correctly as a dream requiring hard work and good choices as a mindless and easy entitlement.

A big smoking hole in the ground: Moral hazards in many shapes and colors

PRE-POSTSCRIPT: Christopher Caldwell has an excellent article in the London Financial Times setting straight the political reality of this crisis: "pragmatism" not only doesn't work, it's precisely what got us into the crisis to start with. "Ideologues" are supposed to be bad, mean people who block "pragmatism"; in fact, they block politically gratifying but false solutions that just cause more problems down the road. It's too bad there weren't more -- many more -- "ideologues" standing in the way of government-sponsored subprime mortgages. There should also have been more "ideologues" (meaning, people who actually know something) more insistent on deflecting the rescue push in a more helpful direction.

The incoherent response of the US and other governments is also a case of "pragmatism": myopic reaction, shaped by panic, and not calming down and thinking it through. The economic knowledge to thread governments and markets through this mess is available in abundance. But politicians, journalists, and others in the chattering classes often don't want to hear it.
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After a busy week, a few brief items to post.

Anyone paying attention to the financial crisis is aware of the role of subprime mortgages and their sponsorship by Fannie Mae and Freddie Mac. They form the weakest part of the mortgage market, so it's no surprise that the crisis hit there first, then spread.

But why the rest of the housing market? It's because of the powerful collective delusion shared by banks, credit markets, the public at large, and the regulators themselves that housing prices would "have to" keep going up forever at eight or 10 per cent a year. This misperception is a textbook case of "bubble" psychology. In an undistorted market, lenders, home buyers, and everyone else, would have perceived risk more realistically and acted accordingly. Subprime mortgages would still have happened, but at a lower volume and higher interest rates.

This misperception played a crucial role in the subprime mortgage fiasco. If I lend you $500,000 for a house, and you're not a good credit risk, but housing prices rise 10% next year, it's fine. If you default and I foreclose on your house, I can sell it for $550,000. I've made money in this supposedly dire scenario. If I expect housing prices to behave that way into the indefinite future, I'm going to be a complacent creditor, willing to lend to just about anybody.

But if housing prices start dropping and appear ready to keep dropping for at least several years, the picture changes drastically. If you're a good credit risk, I'll lend to you, perhaps at somewhat tougher terms (more down payment, higher interest rate), but let you, the borrower, assume the risk of your house falling in value. (You always have the alternative of not buying at all and renting instead.) If you're a bad credit risk and in danger of default, there's no way to avoid losses somewhere: you will lose if and when you sell your house, or I will lose when you default and I'm left with a $500,000 mortgage attached to a $400,000 (say) house.

It is here that we see how Fannie and Freddie set up lenders for unwittingly assuming big risks. Fan and Fred didn't redistribute income or wealth; they redistributed risk, from home buyers, then to the banks lending the money, and finally to the bondholders who bought the mortgages in the form of Fan-Fred bonds. The F-F business model was to buy the mortgages from the bank as bonds and at a discount, then resell them at full value to bondholders. The bondholders did this because behind F-F was the implicit government guarantee of bailout in case of default.*

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Whence the fuel for the bubble in the housing market generally, that part not subprime?

We've already heard from many about moral hazard, the term economists use for some third party (usually government, although it doesn't have to be) guaranteeing an outcome for a certain class of people, regardless of their own mistakes or outsized risks they take. Fannie and Freddie were complex schemes of moral hazard.

But, all over the advanced world, central banks have also long been in the habit of creating moral hazards from policies of cheap credit, holding interest rates artificially low. The money supply grows too fast, but it's in the form of credit, not cash. The result is not "inflation" as we usually understand it (rising consumer and producer prices), but asset bubbles (stocks, houses) and misinvestment. Overly-easy lending practices make everyone too casual about what they invest in and lull them into a false sense of complacency. It wastes scarce savings (capital). Above all, it creates the illusion that certain favored assets du jour will just keep going up in price. In other words, cheap credit enables and promotes bubbles.

Is this possibility relevant to the recent economic history? You bet: it describes the Fed's behavior in 1995-99, as it enabled a massive stock bubble. As the Fed's commitment to price stability wavered in the late 90s and during the 2001 recession, it describes even better the 2002-07 housing bubble, which was accompanied by other classic inflationary signs, such as a falling dollar and rising prices for imported natural resource like oil.**

People wonder if the huge injections of credit by the Fed and other central banks over the last few years will lead to inflation down the line. The response is, they already have done so. These injections kept housing and natural resource bubbles going for several years. But it's not possible for central banks to keep manipulating economies and financial markets indefinitely this way. Eventually everyone gets wise and readjusts their behavior and thinking. That's what's been happening for the last year or so, and we're now heading into deflation, at least for a while.
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* Where did Fannie and Freddie's profits go? F and F both sold stock to shareholders, and they got some of the net proceeds. The rest went into that Congressional patronage pot already mentioned, the Affordable Housing Trust Fund.

** Slightly older but relevant to the present crisis are the 1980s bubble and 1990s post-bubble stagnation of Japan. Again, the central bank played a pivotal role in spreading lots of cheap credit around and driving up real estate and other asset prices to fantastic levels.

The last credit show

PHOTO OF THE YEAR: I love this picture, taken at the Capitol Friday, just after the bailout passed.

Pelosi hasn't the slightest clue what just transpired. Hoyer's distracted smile suggests he knows something bad is going down, but he can't put his finger on it. Only Emanuel's glum look indicates someone who gets it.

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I don't know about all those bloggers who post every few hours, but I've virtually run out of things to say about the financial crisis.

I'm not happy with some of the conservative talk radio types denouncing businesses for running on short-term credit as a form of money. Modern business activity couldn't proceed at the level it does, accomplish what it accomplishes, and employ the people it employees, on a cash-only basis. Long ago (in the 19th century, actually), capitalism outgrew the cash-only system, just as it eventually outgrew the gold standard. Businesses, consumers, and governments make extensive use of short-term credit because spending and income don't always match at every instant in time. Short-term credit is a way to shift money flows so that it does all balance out. The Federal Reserve counts cash and cash equivalents as basic forms of money (M1). But short-term credit functions as money as well and gets added to form M2. It walks and quacks like a duck. Thus, it's a duck.

Sometimes it strikes me that certain conservatives, unfettered, would abolish fractional reserve banking and credit-as-money, thinking that they're just some slick phony-baloney. I wonder if they think a modern economy could function that way.

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OTOH it has been impressive to see economists, especially younger ones, publicly denouncing the bailout. Part of the opposition is prompted by the bailout's being embarnacled with "sweeteners"; i.e., bribes to get the Congress-critters to pass it. But the opposition also has an intrinsic economic basis: the government shouldn't be pledging taxpayer money to buy up assets with declining prices, when we don't yet have a good sense of what their real prices are.

Most economists -- excluding economists opposed outright to any rescue -- have pushed "recapitalization": essentially, some way of tiding over lenders, equivalent to my pet proposed series of ad hoc, strings-attached, short-term loans.* But it's vital to decouple steadying the credit markets and falling asset prices, precisely so that the asset shakeout can proceed without threatening the financial system. To reiterate: the credit crunch has to be dealt with first.

The larger tidying up, with its lessons about moral hazard and its punishment of the innocent and rewarding of the guilty, will take a few years. The government shouldn't be in the business of buying up and reselling distressed assets, except as part of larger post-bankruptcy settlements. Once an economic actor is bankrupt, it's out of the game, so to speak, and the risk of open-ended commitments and market distortions is much lower.

POSTSCRIPT: Some of the biggest doomer-gloomers (like our friend Fabius Maximus) have been pushing the "end of the American era" as a result of this crisis. But the dollar's rise belies such talk. Related crises are happening in Europe and Asia, and they are in some ways worse than ours.

That's also why investment banking, as practiced on Wall Street until recently, won't be decamping to London or Hong Kong. It really is dead.
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* I was probably too harsh on Krugman for pushing "recapitalization." It's the right idea, but banks and other lenders will eventually have to do something about the mismatch between falling housing prices and yesteryear's mortgages. The credit crunch can't wait for that resolution.

Who are the debtors?

PRE-POSTSCRIPT: Drowning in the firehose of commentary about the crisis and "bailout," I can only recommend my favorites, Instapundit (Glenn Reynolds) and Megan McArdle's joint. Reynolds' entries are terse but frequent; McArdle's less frequent and sometimes a bit long-winded (like I'm one to talk). Both have good links to other places. Megan has a funny screed against bad metaphors for the crisis here. Glenn correctly nudges people to use "rescue" instead of "bailout."*

An idea definitely worth supporting is replacing Pelosi and Reid as House Speaker and Senate leader, respectively. Both have been embarrassments to their party and country. Bush's popularity oscillates between 30 and 40%. This Congress' ratings have never been higher than low 20s and have sunk, at times, into single digits. With good reason, it's the most unpopular Congress since World War Two. Assuming the Democrats maintain control of the House (which they probably will, with a smaller majority), the best choice is Clintonista Rahm Emanuel. Politics makes strange bedfellows: weird as I feel typing these words, everyone's disgusted with Reid-elosi, and the Dems desperately need a counter to the cultish children's crusade that is their presidential campaign.

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The credit market and housing debt crisis continues to gyrate. Strangely, it seems to have boosted the prospects of the party that bears much of the blame for it. Remember: government is now involved in backing about 40% of home mortgages.

While I would have voted for the bailout bill if no alternative were available, I completely understand the motives of the House members who voted against. They got an earful from their constituents and only weak pressure from the House leadership. It's essential to decouple the credit-liquidity crunch from the longer-term asset-decline problem. It's too early to seriously discuss responding to the latter. The former needs a response now.

Finance/economics blogger Fabius Maximus (F.M. from this point) recently published a fascinating and frightening look at American debt trends since World War Two. While his views are always loaded with doom and gloom, this argument is worth a look; he's backed it up with hard numbers ultimately based on what the Federal Reserve tracks. F.M.'s debt ratio charts show various categories of debt from 1952 until now, as a fraction of GDP. (The GDP is gross domestic product, the annual output of the American economy, the world's largest, at a little more than a quarter of the global total). I'll admit: my jaw dropped too.

Such high debt ratios are the deep fact now spooking credit markets and foreign investors, deeper than the immediate credit crisis or falling housing prices. No society can get into as much debt as we're in and not create a huge crisis of confidence among lenders. With no sign that the debt accumulation will stop, they've cut back their lending, even to the creditworthy. We've been lucky that this debt is denominated in our own currency, allowing the Fed to massage the money supply and keep credit crises at bay in the past. But, still, there is a limit. Evidently, we've reached it.

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From these charts, both the numbers and their trends, we can draw some conclusions at some variance with received wisdom.

Government itself, far from being the main debt culprit, is the least. Its ratio reached an absolute peak in 1945 and has not approached it since.

A large federal debt does seem to be a permanent feature of modern America. The period of the 1960s and 1970s, when the federal debt ratio dropped, is misleading in one respect. In that era, government policy was to print money rather than borrow it. The tendency to borrow, established in the 1930s and 40s, returned in the 80s. OTOH, the effect of peace dividends is real: the drop of the federal debt ratio after World War Two and in the late 80s and early 90s reflects the end of one very large and another, less intensive, conflict. Both the 1950s and the 90s were periods of falling federal debt ratios, because the pressure to increase government spending had eased off. The period after 2000 was marked by a smaller, but still significant, surge in federal debt, mostly a result of the Republicans' new eagerness for big government.**

Business enterprises, both financial (banking and insurance, essentially) and non-financial, have developed a large leveraging habit, borrowing in good times -- during economic expansions -- and paying down in bad -- during and just after recessions. They learned to start doing this in the Great Inflation of the 1970s, because inflation makes debt attractive.

But the habit persisted long after high inflation ended in the 80s. The rationale for business debt is simple: borrow now, found or expand a business, and future profits will more than take care of it. While this "leveraging" generally works, it doesn't work consistently enough to prevent major debt crises from hitting poorly performing corporations at every recessionary downturn. It's a risky strategy with extravagant real payoffs, but frequent casualties as well.

Finally, Americans as consumers, individuals and households, have by far the biggest taste for debt -- an extraordinary taste for it, in fact -- much more than corporations and government.

The largest component of this debt consists of mortgages. But it also consists of credit cards, student and home equity loans, and all the rest. Almost 40% of this debt ratio's increase occurred just in the last 15 years or so.

Powerful institutional and social habits reinforce the preference for personal and household debt. Many of our institutions, both public and private, make debt look and feel very attractive. While bankruptcy was made more punitive a few years ago, lending standards have continued to drop (at least, until a few weeks ago). Inevitably, there will soon be a lot of people in a lot of financial pain and legal trouble. It was fine to make bankruptcy more punitive -- but only if borrowing itself had been made more difficult as well.

F.M.'s charts make me wonder something else. Rather than take on too much debt themselves, government (in relation to housing and higher education) and banks (in relation to credit cards, mortgages, and home equity loans) have instead encouraged ordinary people to take on debt, a lot of it. Preaching prudence and probity, but also enticing us with borrowing and spending, often ready to "juice" the economy with cheap credit, these are institutions at war with themselves, sending very mixed messages.
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* More accurately, Part I (credit crunch) is a "rescue"; Part II (falling house prices) is a "distressed asset collection and fire sale."

But, ah!, a cynical Ann Althouse smirks in the background :)

** An important feature F.M.'s charts is that his current federal debt totals about $6 trillion, not the $9 trillion you usually hear.

The reason is that he doesn't count $3 trillion in past Social Security and Medicare debt, which (as he rightly points out) merely consists of IOUs written by government to itself. It is not part of the federal debt held by bondholders. In any case, present entitlement costs are at this time paid for by present tax revenue. That will start to change in the next decade, however.