People ask me all the time what can be done about this economy. Usually, they mean it rhetorically. That is, we fouled up so much, there isn't anything we can do, is there? Squeeze your hands in frustration. Wait it out.
But my answer is not rhetorical. In fact, there is plenty to be done. But the president and a lot of Congress refuse to do it. Republican presidential candidate John McCain remains in free-market oblivion. Somehow the markets will work it out. Above all, don't be chicken and bail out those who are responsible. Real men believe in moral hazard.
Fortunately, the Federal Reserve has done pretty well at treating the symptoms. It is up to the president and Congress to deal with the first cause. They are not.
Let me stress, nevertheless, that it is important to address symptoms in the economy, as in health, because they can make matters very much worse. Less credit available in the current subprime mortgage crisis means fewer loans and therefore less investing and consumer buying power. That can produce recession, lost jobs, lower wages and still less investment and consumption. Rising oil prices is a second shock making matters worse.
But the cause of the most serious danger is clear: it is the ongoing collapse in the housing market. It is not abating. The Fed can't handle this alone. Defaults keep growing, prices keep falling. As people get in trouble, they put their houses on the market. As they default, banks take over and put houses on the market. And prices of course keep falling. That means more defaults, more bank losses, fewer loans to business, less investment, and so on. Ed McMahon is now the Beverly Hills poster child for someone who is in default because he can't sell his house.
The Democrats in Congress led by Barney Frank knew they had to act promptly. They put up $300 billion to plug the dam early in the year. The rest of Congress and the president didn't go along. There may be problems with the Frank plan, but then come up with something else. There are good ideas out there.
At least Barack Obama is demanding action, as McCain falls back on the old personal responsibility nonsense. But I think Obama should be talking about this all the time, and coming up with bolder programs.
Here's the main point. America is not caught in a trap from which it cannot escape, though there will be injuries. Yes, there is something -- many things -- that can be done, practically speaking, to mitigate the damage. The small chorus of people who keep warning against bail outs that protect those who should have known better are either naïve or self-serving. Reducing moral hazard never kept economies in line -- there was life before the Federal Reserve in the 1800s and it was very painful.
Now is a good time for economic leadership. So far Obama has a big edge. But he should widen the lead. (As for oil prices and speculation, that's for a future post.)