When you Find yourself in a Hole, Keep Digging until you Pop your Head through the Floor of the People's Bank of Beijing

Full disclosure: Dwight, this was too good to leave on your comments page.

In discussing the Iraq war with Dwight from Logic and Politics, I agreed with his assertion that if we're not wanted in Iraq, we should leave them to their mess. Frankly, I said, it never made any sense, other than the cronyistic nature of the no-bid contracts that were going to Blackwater, Halliburton and the like; it was Bush and Cheney's own little Keynesian economics project, which kept the economy from collapsing until . . . well, until it collapsed in spite all the government investment in the private sector.

I don't suppose it had anything to do with the fact that many of the corporations that have profited from the war in Iraq have been outsourcing a sizable portion of their production overseas--a strategy which takes government dollars from our economy and filters it through corporate coffers into reduced payrolls in developing nations, so payroll turnover is spent there, instead of here. Frankly, the the only way they could keep it going here was to convince the Wal-Mart employee that s/he could afford (and deserved) a split-level, five bedroom/three bath house with a Hummer, an Escalade and a pair of snowmobiles/motorcycles in their three car garage.

This is a market correction: in what universe is a cramped, two bedroom, one bath in East LA worth $600,000? A simple rule of macroeconomics is that where supply curves meet demand curves is called "equilibrium." When a market is out of eqilibrium, as it was during every boom we've experienced from George Washington forward, an "invisible hand" (AKA "market forces") has a way of pushing things back into equilibrium. It's not magic, it's just common sense: who's going to spend $600,000, plus interest, for the privelege of fixing their own pipes and paying dues to a home owner's organization, when it costs less to rent, with none of the headaches? So yes, those who appear to be downplaying the economic crises, are correct, this is unequivocally a market correction. The problem with the kind of market correction that we're going through is, how do you stimulate lending when the prime rate is already hovering around zero and most of the potential borrowers are leveraged to the point that they couldn't borrow their best friend's lawnmower? The Keynesian solution, employed during the Great Depression, if used to escape the current economic crisis, will require a level of spending that will make budget deficits under Presidents Reagan, Bush and Bush look like what they never even tried to deliver on: fiscal conservatism.

And capital? What capital? It's all borrowed money--every dime. Remember the good old days when savings accounts would yield 4.1% per annum? It was 3-7 per cent less than inflation, but at least capital was something other than a promissory note. People had savings accounts because they could earn money on them and banks had capital because they didn't expect savings account holders to give their money away.

The solution isn't hard to grasp, but it'll be painful for years to come, because inflation--as bad as it's been--will skyrocket. In order to attract savers, the fed will have to raise the prime rate so that interest rates will pay a reasonable return on savings. All of this will take time and it will cost more just to live than ever before. But when you're in a hole, you have to, at some point, stop digging, even when you're halfway to China and you forgot to bring your trusty ladder. The one thing we have going for us is how many of us wound up in the hole together. It is that "hole unity" shared by all Chrysler employees that made it possible for the company to survive: according to the Los Angles Times, the Union is buying controlling interest of the automaker--not something GM employees could ever dream of doing, even if 21,000 of them weren't losing their jobs.

There appear to be some advantages in being small enough to fail, after all.

Update: so much for an employee-owned Chrysler. According to the Guardian (UK), some hedge fund speculators, such as Oppenheimer Funds, Perella Weinberger Partners and Stairway Capital, whose greed helped to sink the global economy, were holding out for a taxpayer bailout, claiming that taxpayers and unions "were getting preferential treatment." Among banks willing to write off up to 2/3 of the automaker's debts were JP Morgan, Citigroup and, my favorite punching bag of the financial bailout, Goldman Sachs. While Chrysler may survive bankruptcy, their can be no doubt that the hold-outs once again gambled with other people's money and lost--again: by forcing Chrysler into bankruptcy, the holdouts may well be forced to take a smaller settlement than the one they turned down.