The economic crisis explained in six words

“the big banks blew themselves up”

Simon Johnson

What, you want more?  How about this primer, one clause at a time:

The big banks blew themselves up,

along with a gigantic housing bubble that they did much to inflate.

The collapse of house prices meant the collapse of the largest component of Americans’ wealth.

With banks in trouble and consumers having less money in their house-shaped piggy banks,

credit got harder to obtain

and consumers spent less,

which also caused firms to invest less.

Those last two things caused unemployment to skyrocket.

The Fed and Congress bailed out the banks,

which stabilized the banks,

but couldn’t get them to lend money

and couldn’t get nervous, indebted consumers and businesses to borrow money.

The Fed did practically everything it could to boost the credit markets,

by cutting its main interest rate to zero and creating lots of bank reserves,

but it wasn’t enough.

The government passed spending and tax stimulus bills to boost the economy,

but the stimulus was too small.

Another stimulus could help close the gap,

but the same folks who didn’t object to deficit spending for wars and tax cuts,

have a big problem with deficit spending for other purposes.

Let’s just hope the economy comes back on its own,

because that seems to be the only hope right now.

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3 Responses to “The economic crisis explained in six words”

  1. Laurence Says:

    The malfeasance of the banks, and indeed of all of the fraudulent lenders, stems from Fed Policy. (Remember the Greenspan Put?) It has occurred this way throughout U.S. history. The central bankers, hoping to spur borrowing, pin rates at some artificially low number by flooding the system with newly printed money. The market interprets low interest rates as a sign of low risk and then acts accordingly, borrowing and lending in an exponential fashion until the whole thing collapses of its own weight. Creditors and borrows alike get destroyed, except for the big international banks who, through fear-mongering, convince the government (and sometimes the populace) that they need to be bailed out for the public good (again). The Fed is owned and works for the banks, not the government or “the people”.

  2. Mark E Says:

    Wonderful synopsis of the financial crisis. I couldn’t agree more with your take on the government’s spending priorities. The only way out of this mess, other than to cross your fingers and wait and see what happens, is to put the money in the hands of the people who are actually part of the economy.

  3. Alex Says:

    Thanks for the clear summation, Ranjit. I agree with Mark on the need to put money into the actual middle/working classes: bigger infrastructure projects, jobs programs, tax and spending incentives for everyone but the rich. I’d also add, the finance bill needs to be strengthened just like health care.

    Can someone explain why reinstating Glass Steagall was never under serious consideration? Why not roll back some of the deregulation of financial markets, as that was the problem under Hoover as well as Bush (and Clinton and Bush I and Reagan)? Now we’ve got this 2000+ page morass that puts the burden on the regulators to come up with rules and enforcement mechanisms. I understand the reasons for that, I’m just not hopeful when it’s the corporations and banks that have all the access and influence. The pressure on the bureaucrats is worse than ever in our history.

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