Over the past two weeks there has been a ton of debate over the condition of our financial infrastructure. The Administration says the situation is dire, but a scad of economists have opined "not so much". Both sides have mumbled and stumbled through various explanations and metaphors. Yet it is clear that to the average person, trying to make sense of this situation, what comes through is largely gobbledygook!
I am a fairly educated person, with several degrees and some limited education in economics, yet in trying to understand what the heck is going on, I sometimes feel like my head is going to explode. However, light is dawning a bit...
Here is the suggested explanation I sent to the Obama campaign that could be used to try to offer a little clarity to the average voter...
This is crisis about more than the greed and trickery of Wall St. While that is an issue that we must face and correct, it is not the issue that we have to deal with at this moment.
No, what the rescue package is about is the very serious problem of credit that is reaching crisis proportions. Credit is like an underground river that waters the economy. We don’t see it, but if it dries up, so does our jobs and stores and hopes for a new car. And credit is already starting to dry up.
Let me give you a few examples... one of the ways we measure the availability of credit is to look at the markets. Not the stock market, or the DOW or NASDAQ, but the credit markets. And one indicator on that market is the LIBOR or the London Interbank Offered Rate. That is the rate of interest that banks use to borrow from each other in London. 24 hours ago, the LIBOR rate was 2.75%, but since yesterdays vote that rate has soared to 6.88%, up over 4%.
The Boston Globe reported that the State of Mass yesterday tried to borrow $400 million to make some routine quarterly payments to cities and towns. But the credit markets froze at midday leaving the state $170 million short. They had to make up that $170 million by taking it out of their treasury and leaving themselves dangerously short of funds for the immediate future.
And cities too are already having problems... even though cities are usually considered good bets to pay off their debt. New York recently had to pay an interest rate of 9% on a $75 million short term debt issue – a rate that was 7.25% higher than just a month ago.
Now I don’t have to tell you what happens when you state, city or town runs short of cash to pay bills and payroll. Your neighbors, or maybe even you yourself face lay-offs. Needed services get cut, things like road maintenance, or maybe there’s a few less people to work the counter at the DMV when you’re trying to renew your tabs. But it might be something like less Meals on Wheels, or less effective sewage or water treatment, or fewer police and fire fighters. We’ve all seen budget crunches where we live and also seen the decline in the quality of life that follows.
This is what is at stake... our credit is drying up and just like when that underground river that feeds our local aquifer dries up, there where will soon be a lot less in our financial wells to draw from and a lot of them will go dry.
Our rescue efforts were not an attempt to help the guys who broke the dam that let out the water (or diverted the water from that river), no – it was an attempt to make sure at least some of that underground river kept flowing into your community and the business that employ you and your neighbors. It was an attempt to make sure you could draw from it to get the credit you might need to pay for an emergency expense, or buy that new refrigerator or water heater you need. It was an attempt to make sure our farmers could borrow the money they need to plant the next crops of food we all eat. It was an effort to make sure our cities and towns have what they need to keep your life liveable.
So... we are going to go back to Congress and make another attempt to get this important rescue package passed. We need your support and we need your voice. We need to come together and do this work, no mater what Party we belong to, or where we live, or who we support. It’s up to us to make sure that this river of credit keeps on nourishing out businesses, towns, and cities. It’s time to make sure our neighbors and friends will still have their jobs next week, next month and next year.
And after that is done, we must all lend a hand to repair our broken system and to find and punish anyone who violated the law. We must pass new laws to police our financial system so that this does not happen again. I intend to work hard on that if you elect me President.
A lot of the acceptance and support for the drastic measures needed to try to fix this credit problem will depend on how it is explained to the general populace. I'm hoping that some of you who understand this mess can offer simple, clear messages that can be used by the campaign and those folks out talking to voters in these weeks leading up to the election. I'm afraid that without a clear explanation, a sizable number of voters may react against some of our down ballot candidates.