HOW BAD IS THE U.S. ECONOMY?

(Via Atrios) The credit crunch is so bad that Jim Cramer, a prophet of the Free Market Fairy, is urging the government to buy the 4 failing bond insurers. There is a serious point here. If the bond insurers go belly-up, many municipalities will also face hard times:

``The monolines are dead, their business model is dead,'' said David Roche, head of investment consultancy Independent Strategy in London. ``The government is going to have to recapitalize this industry or there will be communities in the U.S. where they can't even flush their toilets'' because they can't afford the services.

(Also via Atrios) Billionaire Mort Zuckerman was on The McLaughlin Group¹ and laid out pretty clearly:

MS. CROWLEY: Right. Last time this was tried, it was the summer of 2001. And what has been shown is that people took those rebates and they actually saved them. They didn't spend them. So it didn't have the effect of inserting and injecting consumer spending to actually fix the problem.

I think, this time around, it may have some marginal effect. But you've got to take on solutions that are going to take on the longer- term problems in this economy. It's not just about a quick fix. It's not just Whack-a-Mole and try to fix. There are some huge problems, as Eleanor points out, dealing with the banks and lenders, a stalled housing market, credit crisis. It goes on and on.

MR. MCLAUGHLIN: Was that an exaggeration, what Monica is saying?

MR. ZUCKERMAN: I don't think it's an exaggeration. I think it's an understatement. You've heard me say here, I think we are facing the worst financial crunch and crisis since the Great Depression. You have the entire banking system now that is virtually frozen, and not just the subprime mortgage thing.

There are other things called credit default swaps where they're going to lose as much money, $250 billion. The banks are frozen. They're not making loans because they have such huge debts that they have to take onto their balance sheets.

And nobody knows how to deal with that, because you had a dramatic -- you have two bubbles that have burst at the same time -- the housing bubble, which has collapsed in this country, the first time since the Great Depression that housing values have gone down for a year since the Depression.

And it's going to go down even more next year.

The credit crunch -- you've just exploded the whole credit system in this country. We were way overleveraged. The banking system was overleveraged. People didn't even know about it. The bankers didn't know about it. They didn't assess the risk. Now that risk is piling in, and everybody's going to pay the price.

It's going to stimulate nothing other than -- I mean it's going to destimulate the economy. Nobody has money to lend. They're saving all their money to pay off their debts. They're borrowing money or looking at the rest of the world to enhance their capital. And it's still not going to solve their problem.

¹Federal News Service

January 20, 2008 Sunday

THE MCLAUGHLIN GROUP HOST: JOHN MCLAUGHLIN PANEL: PATRICK BUCHANAN, MSNBC; ELEANOR CLIFT, NEWSWEEK; MONICA CROWLEY, SYNDICATED RADIO COMMENTATOR; MORT ZUCKERMAN, U.S. NEWS & WORLD REPORT;
TAPED: FRIDAY, JANUARY 19, 2008;
BROADCAST: WEEKEND OF JANUARY 20-21, 2008