During the Democracy Intensive in October, Woolman students broke into five small groups to research different issues affecting our nation. Here is what the group looking at the current economic crisis wrote:
Our group dissected the economic crisis into four bite-sized chunks: the mortgage crisis, the credit-default swap market, the commercial paper market, and HR 1424, popularly known as the “Bailout Plan.”
For research, we conducted man-on-the-street interviews with citizens of Nevada City, as well as listening to radio shows and calling congressional offices. Most of the people we spoke with identified the economy as the largest single problem affecting our nation today. However, most people felt that they were tragically uninformed of the details of the situation. Our group discovered that although the sub-prime mortgage issue catalyzed the current economic crisis, many events worked in concert to deliver our fiscal system into the mess it’s in.
Banks used the debt of the sub-prime mortgages as structured investment vehicles with very competitive rates of return. When those assets tanked as housing prices dropped, the banks “broke the buck” and started giving negative returns on short-term commercial paper market loans. As a result, banks refused to continue funding the commercial paper market, effectively freezing our economy for a short amount of time. HR 1424 was penned in response to this crisis. The idea is to inject enough capital back into the market in order to keep the short-term commercial paper loans going, as well as keep the banks afloat.
According to Paul Krugman of the New York Times, there are two main options for injecting this capital back into the market. The first is the Paulson plan, which, “calls for the federal government to buy $700 billion worth of troubled assets” no strings attached. Essentially, the government would have to assign arbitrary values to worthless assets in order to buy them up at a reasonable price. The plan Krugman supports is called the stock injection plan. Krugman feels that, “if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to – a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.” However, this idea smacks of socialism and is found unsavory by many conservatives.
Obviously this issue is much more complex than we presented here, but hopefully now you feel a little bit more informed about our economic state.
(We’d like to thank Ira Glass, Paul Krugman, and The Long Johns for unwittingly giving their support to this project.)