From Bad to Worse, but Far From the Worst

BECAUSE Topic A in every newspaper and television show is the economy, may I offer a bit of analysis of what is happening, how bad it is and isn’t, and what a cure might be?

We have a major financial crisis. The banking system is in a state of peril not seen since the early 1930s. But by many other metrics, as bad as the economy may be, it’s not remotely like the Great Depression.

Unemployment now is 7.6 percent. In 1933, it was roughly 25 percent. That was more than double the rate in 1982, our worst recession since — which was still far worse, so far, than what we have now. Our current situation will probably become worse in terms of unemployment, but we are not back in the bad old days yet.

More painful in some of those past years, we also had high inflation — far higher than we have had recently. Inflation is now virtually nil. In 1980, the unemployment rate reached 7.8 percent, and the inflation rate gusted to almost 15 percent.

There was a period from the mid-1970s to the early ’80s when the “misery index” — inflation plus unemployment — was often above 15 percent and sometimes above 20 percent. Today, that misery index would hover at about 8 percent, depending on how one calculated inflation (as the core rate without food and oil products, or as the “headline rate” with them).

This is not to deny that real people are suffering now. The lot of the involuntarily unemployed is deeply grim.

But the main crisis now is not unemployment, at least not yet. It is about the lending institutions of this country. The financial entities of this great nation — both banks and less regulated or unregulated entities — took wild, spectacular, immoral risks with credit.

It turned out that shrewd speculators could take advantage of those mistakes when the credit bubble burst and make extraordinary sums of money, all the while terrifying markets and making the crisis worse. It also turned out that the blunder of blunders was made by allowing Lehman to fail, essentially causing a cerebral hemorrhage in the world’s financial brain.

That’s where we are now. Banks are in extremis from the bad credit decisions they made and mistakes the Treasury made. The effects have rippled out into the broader economy as businesses that were denied access to credit by panicked lenders have had to lay off workers. Some have been unable to stay in business anyway, and a full-blown recession is here. Now it’s been revealed that as bad as the credit losses of banks and other entities were first thought, they are actually worse.

Today, the lenders’ problem is that their losses have been so great as to impair their capital. They are in a state of fear that if they lend money again, those loans will go bad as well. They are too traumatized and wounded to lend. For some banks, to lend might be to die.

What is the solution? With the greatest respect to President Obama, it is not necessarily to hire men and women to build more wind-power windmills, or “21st-century classrooms.” These plans may have merit in and of themselves. But they do not get at the central problem: credit. The International Monetary Fund just issued an opinion to the same effect: that the United States economy and the world economy will not revive until the credit crisis is resolved.

The solution is to lend the banks more federal money. They have had huge losses and need huge amounts of help. Yes, they will do stupid, immoral, evil things with some of the money. They are humans and that’s what humans do. We’re sloppy and often dishonest.

We went through something a bit like this in the early 1990s, when the results of staggering mismanagement pulverized savings and loan institutions. The government acted swiftly and sensibly under Bush 41. The Resolution Trust Corporation assumed bad loans of the S.& L.’s and sold them to bidders, and we went on with the nation’s business. In the end, the government made money on many of the assets, then “toxic,” that it bought.

WHY not do the same thing now — buy the bad assets of the banks and take them off the banks’ books? That was the original plan of the Troubled Asset Relief Program, and it was a good plan. Yes, there will be colossal valuation issues. Yes, there will be fortunes made because government bought too high and sold too low. That’s what happens in life. Again, life is sloppy.

But if the crisis is really an economic Pearl Harbor, as Warren E. Buffett says, we have to behave as if it’s war. There is a lot of waste in fighting a war. But it is far better to waste money than to lose the war. We have to get money into the banks by buying their assets, taking them off the books and reliquefying the banks and other lending institutions. As I have been suggesting for a while now, we should also start making guarantees on bank loans, absent fraud, and make sure the banks have no excuse not to lend.

That will keep businesses going. That will use the power and money-creation magic of the Federal Reserve to thaw the frozen rivers of commerce, to paraphrase Franklin Roosevelt. That will put the private sector’s ingenuity to work. In the end, the government might even make money off some of those toxic loans, the way the R.T.C. did.

Again, I do not doubt that much of what Mr. Obama now proposes has merit for reasons having little to do with the economic situation. But right now, this minute, we are in a financial-monetary crisis. It is begging for a financial-monetary solution, not mammoth public works, which might be useful down the road. Let’s start on the credit issues yesterday.