COURIC: And when it comes to establishing, I was curious, what newspapers and magazines did you regularly read before you were tapped for this to stay informed and understand the world?
PALIN: I’ve read most of them, again with a great appreciation for the press, for the media.
COURIC: Like what ones specifically?
PALIN: Umm… all of them. Any of them that have been in front of me over all these years.
COURIC: Can you name any of them?
PALIN: I have a vast variety of sources where we get our news…
The basic plot of what has happened in our financial system for the past few months is taken directly from a script of late 1920s vintage. If you understand the Crash of '29 and the Great Depression, you understand the "subprime crisis." It involves only some word replacement.
In the 1920s, people decided that stock prices would never go down (in the famous quote, they had "reached a permanently high plateau") and thus began speculating – buying heavily on margin (i.e., with borrowed money) and getting loans from financial institutions with stocks as collateral. Then, as overvalued stocks tend to do, the prices came crashing down. People could not meet margin calls because the assets they purchased with borrowed money were no longer worth anything. Loans defaulted en masse and banks subsequenty failed in droves. Capital-starved banks all but refused to make new loans or, more commonly, simply couldn't. We experienced deflation, which doesn't get the press of inflation but is in many ways much worse. The money supply sharply contracted because of all the "paper wealth" that disappeared with stock prices and loans made in real dollars that were repaid with defaults.
If you need to understand what is happening now, just replace "stocks" with "houses". Lenders completely abandoned lending standards not because they thought Joe Deadbeat could repay his $400,000 mortgage on an $18,000 salary, but because they convinced themselves that the underlying assets would never lose value. Just like 1929, only with different assets. Say some lender sees Ed's application (annual income: $15,000) and realizes he can't afford a $400,000 mortgage. They lend Ed the money anyway because they assume, crucially, that Ed will pay for a while and then, when he no longer can, he will simply sell the asset to someone else for $400,000. Heck, he might even make a profit since home prices always go up! Instead, of course, what happened is that people were given mortgages they couldn't handle and, when they finally could no longer keep up, they went to sell their $400,000 home and found out that it is worth $200,000. Hence defaults by the millions.
You can accurately point out subtleties and relevant points that the preceding oversimplification has omitted, but in essence this is what has happened. And now we diverge from the 1929 plotline.
This "bailout" ensures that, while deflation followed the Crash of '29, good old-fashioned inflation is our lot this time around. Where is $700,000,000,000 going to come from? The government is broke and will only get broker as incomes and tax revenues fall. Well, the Treasury whips out the printing press and makes $700 billion worth of obligations to sell to China. Thus vastly increasing the number of dollars in existence and further watering down our beleaguered currency.
A worthwhile experience, if you ever find yourself in Eastern Montana, is to visit Little Big Horn. One walks around and cannot avoid wondering, "What in the hell was Custer thinking?" The entire landscape and scenario were so obviously disadvantageous to him that his sanity is cast into doubt. In short, by the time someone said "Hey, I think I see some Indians" it was already far too late. The terrible decisions had already been made and subsequent efforts to extract himself from the situation were irrelevant.
Since the scenarios have played out so similarly in 1929 and 2007-2008, we have to ponder whether or not saying "Hey, this is what happened in 1929, let's do something to stop it" is futile now. Yes, we have the foresight of history, enough so that even the Hayek-humping knuckleheads in the White House realize that something very, very bad is about to happen. But the "bailout", as I read it, is an evasive action being taken well past the "I think I see some Indians" point and having little potential other than to exacerbate the already-precarious predicament in which the dollar finds itself. That Congress is hesitant to get onboard what could be a $700 billion albatross is unsurprising.