U.S. Financial Crisis in a Nutshell

There have been many complaints on the web about the U.S. economy becoming socialist if the Bush-Paulson rescue plan is adopted. I suspect in fact that a gut-level fear of becoming socialist is behind the large number of people pressuring their Republican congresspeople against the bailout package. According to CNN, a congressional aid said:

“At the end of the day, these [congressional] members represent the people who sent them here, and the people who sent them here are so overwhelmingly opposed to this … the calls coming into GOP offices are 90 to 1 against the plan.”

In keeping with that, part of resistance from Republicans on Capitol Hill may be a fear that if legislators disappoint constituents this close to the election, there could be dire consequences to retaining congressional seats. Now, I’m a big fan of capitalism and principle, but at the same time we’ve got to be clear on the situation. Even President Bush himself, who is prone toward optimistic portrayals of the State of the Union, says,

“The government’s top economic experts warn that, without immediate action by Congress, America could slip into a financial panic and a distressing scenario would unfold,” Bush said. “More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically.”

For a more in-depth analysis of the possible scenarios, see this Wall Street journal article. President Bush and Treasury Secretary Paulson are concerned that credit markets are freezing up due to the falling value of mortgage-related assets, and this is causing pull backs down the line that can have a snowball effect. There is already considerable churn in the debt market that is crimping the global money supply.