Tuesday, October 14, 2008

Crisis of confidence??

There are a number of commentators, some intelligent, some not so much, who persist in calling our current financial situation a "crisis of trust." George Will likens the bailout programs to national psychotherapy. Robert Reich and Larry Summers, two very respected economists, seem to boil this down to a lack of confidence, and if government can just wave its magic wand of money, everything will be OK again.

I hold these gentlemen (well, not George Will) in sufficient esteem that I have tried to make sense of what they're saying, because I'm not seeing this crisis as a matter of irrational fear. When Reich writes:
The central fact is this: consumers in the real economy are coming to the end of their capacities to keep spending. They can't take on any more debt. And with the costs of energy, food, and health insurance all soaring, they're doing the only thing they can. They're pulling in their belts. They're leaving the malls. They're not buying a new car or TV or anything else they can do without.

For years, regardless of the business cycle, American consumers were the Energizer Bunnies of the world economy. Their spending kept it going. But now the Energizer Bunnies have turned into scared rabbits, and they're going back into their holes.
it's easy to believe that he thinks that there is some pathology going on here. But then the same man writes:
All economic indicators are now pointing toward a deepening recession. Unemployment is already high, and the trend is not encouraging. Factory orders are down. Worried about their jobs and rising costs of fuel, food and health insurance, middle-class Americans are unable or unwilling to spend on much other than necessities.
And I have to confess to some cognitive dissonance, especially as other people, less knowledgeable and respected, pick up on things like the former comment and pass it around as gospel, claiming that injecting "confidence" into the market will fix what ails us.

What I've figured out is that these learned economists are not using "trust" as we use it, not defining it as a personal quality but as a market condition. It's not trust in the sense that we are looking at other people with suspicion, but simply a lack of belief that someone will be able to pay back a loan. It's as if you hire a real estate appraiser to look at a house you want to buy for $200,000, and he writes in his report that he doesn't "trust" that the property is worth that much.

But this causes problems for people who haven't figured this out, which includes a goodly number of the talking heads we hear talking about this situation. Most people do see "trust" and "confidence" as personal attributes, and, when former Cabinet members throw these words around as causes for the current crisis, they see the solution as one of just bucking up and feeling better, a kind of Oprah-fication of real money troubles ("just draw a bubble bath, then put your money in a failing bank, and everything will be all right if you just believe").

[Paul Krugman, new Nobel Laureate, understands this, as witness his retort to George Will on Sunday's ABC This Week, when he pointed out that our problems are not just psychological.]

So I wish Reich and Summers would sharpen their message, talk about what this crisis really represents to actual people. (Of course, I'm out of step with both men and Brad DeLong; as I wrote a couple of weeks ago, I see no way that the national agenda cannot be altered by current events, and all three of these estimable gentlemen disagree with that. They believe that our current deficit, plus the bailout, plus a necessary fiscal stimulus can all be supported, and I think that's pretty much crazy.)

Every single facet of our American society has incurred debts that it cannot pay. People have gone under water on their mortgages and credit cards, businesses can't pay their employees without drawing on their line of credit or bellying up to the commercial paper market, governments show no fiscal restraint, counting on the bottomless wallets of the taxpayers. And the financial institutions that have been shoveling out the funny money to support all this are now in trouble, and I fail to see how the already-strapped federal government can become the Great Enabler for this addiction.

This is not simply fear at work. This is not a 4-year-old who is unable to sleep because there's a monster under the bed. This is a bank looking at a 25-year-old couple who are making $40,000 a year and thinking, "hey, they probably can't afford a $250,000 house, even though we thought so two years ago." This is an employee realizing that her company doesn't have cash to pay Friday's payroll, and no one will come up with a loan to cover it. This is a family having to make a choice between staying in their beloved home or putting little Frank and Mary Lou through college. If this is fear, it's realistic fear, not irrational terror. It's real people undergoing real hardships because they counted on "the system" to go on in its same stupid way.

We don't have a crisis of confidence. We have a reaction to the remarkable overconfidence that we've had for years. We all believed that we could charge purchase after purchase because there would always be another raise, another promotion. We could swing that big flat-screen TV because we could always pull more fake equity out of our homes. We could build another plant because there will always be someone to lend us the money for it. We could put diving pools in our high schools because taxpayers will always pass the next referendum to support "educational purposes."

And now the bill is due. We've bought things we don't need, built things we don't need, committed to things we don't need. And there those things sit, not convertible to other things we do need, and we wonder what we're going to do. If the only two answers are, "Get positive," or "Get the government to prop it up," I'll wager that we're going to be real disappointed.

1 comment:

mcfnord said...

A rant with truth in it, but the crisis of trust is quite a bit more specific than this: the LIBOR rate is the interbank lending rate. It's high because banks don't know which will fail next. And they have 10x their usual (and now quite scarce) cash reserves because they fear runs. So they won't lend to each other and they can't lend to you.

Credit is like oxygen. We don't think of it until it's missing.

I don't blame people for overconsumption. They'll do that. I do blame banks for thinking home prices never go down. It's only as complicated as that.

- call me an idiot! i love it, guy! - mcfnord

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