The economy: worse than you think

This weekend, I got around to listening to the October 3 episode of "This American Life," which explains in layman's terms how we got into this godawful economic mess. I tell you, it was fantastic. It's the best thing I've heard anywhere on this topic. I believe I linked to an earlier TAL episode that did the same thing, and was widely praised; the October 6 episode was a follow-up. There is no transcript available, but it seems that you can download that program for 95 cents from this page on the show's website, or get it for free in iTunes. If you do have to pay for it, it'll be the best 95 cents you spend all week, trust me.

A couple of things from the show stood out in particular, and I feel so strongly that I need to share them with you that I'm sitting here at the computer transcribing those sections of the show. The main idea that I took away from it is that these Wall Street people have been behaving with criminally insane recklessness with derivatives and credit default swaps. Listening to the financial experts on the show explain what credit default swamps are, and how they worked, I could hardly believe that this was legal. But it was -- and nobody in Washington wanted to regulate them. Phil Gramm introduced an amendment to an omnibus funding bill late in 2000, that would have banned regulating CDSs. The Senate voted 95-0 to accept Gramm's proposal. Here's host Ira Glass:

"In other words, this cannot be laid at the feet of Phil Gramm. This was a bipartisan decision, with Clinton appointees at the Treasury Department and the Securities and Exchange Commission joining Fed chairman Alan Greenspan, all saying that credit default swaps and things like them should not be regulated."

Had the CDSs been regulated like the insurance that they were, those issuing them would have been forced to have had the capital on reserve to back them up. They weren't, so they didn't. The CDS market was worth $60 trillion -- and it was built largely on bulls--t. Seriously, you really have to listen to this program to grasp how completely unsustainable this market was, and could not help being. It was an extremely complex -- almost unimaginably complex -- scam. It makes Las Vegas gamblers look like a colloquy of small-town Presbyterian elders. All those Wall Street lobbyists in Washington bought off the politicians. And they all lied to each other. A former regulator tells Ira that back in 1998, it became pretty clear that these financial instruments ought to be regulated, and he and others made that argument. But the Clinton administration and Congress said no, these things are only engaged in by smart people who knew what they were doing and could be trusted. And now look.

Another point: Satyajit Das, a risk consultant who's been involved in this business for 30 years, said that the credit default swap mess, the mortgage-backed securities and all the other aspects of this crisis, are all manifestations of a single massive problem: debt. Over the last 30 years, far too many people piled up far too much debt. And now it's all coming crashing down. Das:

"There will be enormous, enormous losses which will beggar belief. When economic historians come to write the history of this period, they will look at this and go, 'My God, how did they manage to do this?' We don't even understand the quantum of the problem."

He said that not too long ago, Ben Bernanke, who is one of the smartest people in the world on this stuff, testified that the losses were going to be topped off at $50 billion, and was contained. If Bernanke doesn't really know what's going on...

The show concludes with an interview with NPR's economics reporter Adam Davidson, who sums up the situation thus: "It is a severe and scary crisis, and the more I report it, the more scared I have been. ... All these dire warnings that you're hearing, they're not Wall Street fatcats trying to make a lot of money. This is serious."

Now, with that in your mind, read this long post by Sharon Astyk, about the responsibilities that now fall to us ordinary people to respond to the present and future economic cataclysm. Here's how it starts:

In the last few weeks, we have taken a society that already had inequities between rich and poor greater than most societies in human history, and transferred more wealth to the preservation of rich bankers. Just now, finally, the mainstream media is beginning to admit that the bailout isn't going to save us from a massive recession/depression. What hasn't yet penetrated most people's awareness is that we just sold off a good bit of our future.

We just gave the money we were going to spend on renewable energy infrastructure to banks. We just gave them the price of affordable health care. We gave them the money we might have spent on insulation, on sustainable transport networks, on relocalizing schools so that our kids' education isn't mortgaged by energy costs and on a host of other things.

My son anxiously wanted to know if he would have to go out and protest his government. And of course, one of my most fervent prayers is that things will be better for him - and the only possible way that that will happen is if we rebell now against the increasing inequity and misallocation of our resources.