Sunday, August 03, 2008

Vicious Economic Cycle

Wall Street's titans face huge losses ahead, and informed insiders assume a far larger federal bailout will be needed--after the election. No one wants to upset voters by talking about it now.

The bailouts are rewarding the very people and institutions whose reckless behavior caused this financial mess. Yet government demands nothing from them in return--like new rules for prudent behavior and explicit obligations to serve the national interest.

The largest banks and brokerages have already lost enormously, but lending portfolios must shrink a lot more--at least $1 trillion, some estimate.

The gravest danger is that the national economy will weaken further and spiral downward into a negative cycle that feeds on itself: consumers stop buying, banks stop lending, producing companies cut their workforces. That feeds more defaulted loan losses back into the banking system's balance sheets. This vicious cycle is essentially what led to the Great Depression after the stock market crash of 1929.

[Excerpt of an article by William Greider, The Nation]

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