Jay on Economics – Now for Something Completely Different

October 2nd, 2008

Robert Reich, Labor Secretary in the Clinton Administration and NPR pundit, has a terrific blog as well.  He has a lot to say about the failure of banks, credit markets and the proposed “Wall Street Bailout”.

He posted a blog today about the terms of the bailout and why it is better than nothing, but still not good.  The post inspired me so much I left a long comment, and I liked my comment enough that I am reblogging it here as well.  Go read his post, then check out my comment, and thanks for reading.

Robert,

I am with you most of the way here, but I would say the most important need is not *only* to help homeowners avoid foreclosure, but to help *all* borrowers- individuals and businesses- do the same.

If I run a business I need both customers to buy products and employees to create/provide the products.

The customers may be hard to find in the next 6-24 months. If I can’t borrow to pay my employees and stay alive- going much deeper into debt than I ever wanted in the process- I may simply be dead before the customers come back.

There is a line here from employee -> employer -> lender -> Fed. Everyone along the way needs direct help from the Fed, but the answer to your question about keeping credit markets functioning is that lots of individuals and businesses need the credit *even though* they can’t afford it. The Fed needs to either lend money to people and businesses directly or convince lenders they can afford to do so.

So how do you convince lenders to extend more credit to businesses and individuals who could be high default risks in the short term? That is the $700B question, to be sure.

I believe Congress is heterogeneous enough that it is incapable of giving a single answer to a question like that- the pitfall of democracy, I suppose.

Still though, the bailout package sure does miss the boat on a lot of issues.

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