Oops!

Wall Street had a pretty bad week but the bad news just keeps on coming. The latest tremor seems to be the prospect of a downgrade of bond insurers. The money involved is huge - trillions. Kevin Drum summarises in the link.

Paul Krugman's column today has some insights into the bigger picture. The US has been playing a very familiar game, living high on the hog on borrowed money, and this story always ends the same way.

Mexico. Brazil. Argentina. Mexico, again. Thailand. Indonesia. Argentina, again.

The story has played itself out time and time again over the past 30 years...

To be more precise, some in the US have been living high, most of the rest of us are just getting by, but Cheney's Halliburton options are doing quite well, thank himself very much. Bush and his Congress has been spending like crazy though, and so have American consumers.

Fed Chairman Ben Bernanke looked at the phenomenon in his previous life and observed that it was OK though, because:

The global origins of our current mess were actually laid out by none other than Ben Bernanke, in an influential speech he gave early in 2005, before he was named chairman of the Federal Reserve. Mr. Bernanke asked a good question: “Why is the United States, with the world’s largest economy, borrowing heavily on international capital markets — rather than lending, as would seem more natural?”

His answer was that the main explanation lay not here in America, but abroad. In particular, third world economies, which had been investor favorites for much of the 1990s, were shaken by a series of financial crises beginning in 1997. As a result, they abruptly switched from being destinations for capital to sources of capital, as their governments began accumulating huge precautionary hoards of overseas assets.

The result, said Mr. Bernanke, was a “global saving glut”: lots of money, all dressed up with nowhere to go.

In the end, most of that money went to the United States. Why? Because, said Mr. Bernanke, of the “depth and sophistication of the country’s financial markets.”

All of this was right, except for one thing: U.S. financial markets, it turns out, were characterized less by sophistication than by sophistry, which my dictionary defines as “a deliberately invalid argument displaying ingenuity in reasoning in the hope of deceiving someone.” E.g., “Repackaging dubious loans into collateralized debt obligations creates a lot of perfectly safe, AAA assets that will never go bad.”

Oops!

But guess who gets the bill?

For eight years the American public bought the free lunch fantasy the Republicans sold us, and now they are starting to pay. Have they learned anything yet? For sure the Republican party hasn't, because they are still selling the same old voodoo.

If we are quite lucky, we will shamble out of this sadder but wiser, bruised but still with a powerful economy. If we aren't, our children will inherit a much poorer and weaker country.