Conservatism's Wild Financial Ride

What a great day for McCain advisor Donald Luskin to tell us all that the economy is just fine and to quit our bitching! Expert timing!

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.

I think this has been summed up the best by a former finance minister in an NPR story this morning: "Even my 6 year-old daughter knows that you don't lend money to someone who can't pay you back."

In the end, that's what this is all about. Global investors needed a security to make them a yield, and the housing market was booming in the US, so financial institutions lent to anyone who walked in the door. They thought they could stay one step ahead of the inevitable crash, but in the end it was impossible. And because millions of people couldn't pay them back, they disintegrated.

What's different here is that Lehman was allowed to slip into bankruptcy. With Bear Stearns the government stepped in and created so much grease for the wheels of a sale that it was a bailout in function if not in name. This time, while the Fed is extending liquidity, there is no wholesale takeover or bailout in place. Enough was enough, and the American taxpayer couldn't be expected to bear yet another burden of shortsighted decision-making by the big banks. The feds had to end the moral hazard that would have resulted in bailouts for any financial services giant with a hangnail. (UPDATE: Krugman sez it's more of a bailout than it appears.)

However, anyone that thinks this represents touching bottom is crazy. AIG could go under, and a major insurer bugging out would be an even bigger hit to the economy. The big banks are all going to be on the hook for their poor decisions, sooner or later.

Here's Barack Obama's statement:

"This morning we woke up to some very serious and troubling news from Wall Street. The situation with Lehman Brothers and other financial institutions is the latest in a wave of crises that are generating enormous uncertainty about the future of our financial markets. This turmoil is a major threat to our economy and its ability to create good-paying jobs and help working Americans pay their bills, save for their future, and make their mortgage payments.

"The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren’t minding the store. Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression.

"I certainly don’t fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to. It’s a philosophy we’ve had for the last eight years – one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else. It’s a philosophy that says even common-sense regulations are unnecessary and unwise, and one that says we should just stick our heads in the sand and ignore economic problems until they spiral into crises.

"Well now, instead of prosperity trickling down, the pain has trickled up – from the struggles of hardworking Americans on Main Street to the largest firms of Wall Street. This country can’t afford another four years of this failed philosophy. For years, I have consistently called for modernizing the rules of the road to suit a 21st century market – rules that would protect American investors and consumers. And I’ve called for policies that grow our economy and our middle-class together. That is the change I am calling for in this campaign, and that is the change I will bring as president," said Senator Barack Obama.

This is exactly right. It's a failure of deregulation - as sure as the Enron meltdown and the accounting scandals were failures of deregulation. Nobody was paying attention to the mass lending to those who couldn't pay it back. And it wouldn't hurt to add that deregulation's biggest champion is McCain economic adviser Phil Gramm. It's a fundamental tenet of conservatism that you allow the "free hand of the market" to reign supreme. Of course, when capitalists make bad decisions they go running to the feds for a handout like good little corporate Communists. But the end result is that other federal services gets stripped of funding. And government shrinks. And so this meltdown is a designed one.

And by the way, Obama has been saying this for at least a year and it was a key moment in his acceptance speech at the DNC. The problem is conservative theories that increase inequality and squeeze the middle class, choking off the potential for prosperity as a nation. This is also the result of an economy that consists of flipping burgers and pushing papers instead of creating and building. The green jobs program that Obama has supported fills the biggest economic hole we have, in the manufacturing sector.

McCain released a similar statement to Obama today, but he also decided it would be a good day to keep using his line that "the fundamentals of the economy are strong." It's completely unclear what he even means by that, but it wasn't lost on the Obama campaign:

“Today of all days, John McCain’s stubborn insistence that the ‘fundamentals of the economy are strong’ shows that he is disturbingly out of touch with what’s going in the lives of ordinary Americans. Even as his own ads try to convince him that the economy is in crisis, apparently his 26 years in Washington have left him incapable of understanding that the policies he supports have created an historic economic crisis,” said Obama campaign spokesman Bill Burton.

Joe Biden jumped on this as well today ("...friends, I could walk from here to Lansing, and I wouldn't run into a single person who thought our economy was doing well, unless I ran into John McCain."). And the SEIU.

This roller coaster in the financial markets was constructed by conservatism and serves the goals of conservatism. This is the connection that must be made.

...apparently, "fundamentals" means workers, in McCain's world. Why do you hate workers so much?