In the Washington Post, Ezra Klein has a thought-provoking column today reminding us that governments can have only limited impact on the state of the economy.
That has become painfully obvious this week, after the U.S. government more or less resolved the “crisis” that resulted from its own debt ceiling rules. Stock markets responded with a scary selloff that is continuing today, Aug. 4.
Governments here and abroad have no quick fixes for the fundamental problem of this economy: The prosperity that peaked in 2006-2007 was based on borrowed money. Money was borrowed and lent on the assumption that there was no limit to the rise in real estate prices. When that foolish assumption became demostrably false, there was a crash. Household mortgages were under water, banks had books full of bad loans, and the big financial firms were stuck with all kinds of complex instruments that multiplied their losses.
Now everyone is retrenching. Lenders have less to lend and are more cautious with what they do have. Consumers are (rightly) cautious about borrowing and spending.
The economy needs some real productivity to replace the collapsed economy based on borrowing and consumption. Eventually, we hope, entrepreneurs will provide that. But it won’t happen fast.
Here’s another good summary of the current situation from Fox.
Over at the Seattle Times, Jon Talton is always worth a read too.
Here, prominent conservative David Frum, on his blog FrumForum, suggests that events are proving that Paul Krugman, not the Wall Street Journal editorial page, has been proved right about the economy.