"This sucker could go down,” declared President Bush, after the White House leadership summit failed to reach agreement on a bailout plan for the financial services sector. The President is one of the last to recognize how bad the economic situation really is. But the
The root of the problem is this: the
First--the borrowed money. Both government and consumers have been spending beyond their means, almost continuously, for two decades. The federal government has had huge budget deficits every year since 1980, except for a few years during the
Government profligacy is matched by consumers: the household savings rate in the
Consumer spending now accounts for two-thirds of all economic activity in the
All of this is starting to unravel now. People borrowed more than they could afford; the mortgage crisis undercut their ability to repay loans and mortgages; the banks and loan agencies faced mounting defaults and declining profits and stock prices. Banks are increasingly unable or unwilling to extend loans to businesses or individuals, which will crimp both consumer spending and economic growth, accelerating the economic downturn.
So this $700 billion bailout, as large as it is, will only scratch the surface of these multiple dimensions of debt and economic weakness. We cannot continue to grow, based on borrowing against the future. The domestic financial pot is empty, and our foreign enablers are wising up. The economy will contract, our standard of living will decline, and more people will join the ranks of the poor and unemployed. This sucker could go down. The U.S. is in for tough times.