Any Fool Could Have Seen This Coming - Including This One (Part Two)

Way back in 1988, I wrote a book called The Captive American. I happened to glance at chapters 14, 15, and 16 the other day, which discussed the economic troubles facing our country back then. I was stunned by how little has changed. What’s the old saying? Those who don’t learn from history are doomed to repeat it? Take a look at what I wrote 20 years ago and see if our failure to learn from our mistakes doesn’t break your heart the way it broke mine:

The debt we’re saddled with could become a classic Broadway ticker-tape parade, with the paper IOUs raining down on a confused people … The long term effects of this trend are not yet clear, but many people envision a weakening of American power. It’s possible to live on other people’s money for just so long. Eventually the lending window is closed, and the creditors come around to collect. They may even ask for a bigger say in domestic policy. Can we rely on our financial institutions to remain steady? I hope so, but I’m not too optimistic. (Pages 146, 153-154)

What did this over-reliance on debt and funny money to fuel our economic expansion get us 20 years ago? A stock market crash and a credit freeze, that’s what. On October 19th, 1987 - AKA Black Monday - the Dow Jones dropped 22 percent and banks stopped lending money to one another or anyone else. Sound familiar? What’s also all too familiar was the government’s response:

At the height of the panic on Tuesday (October 20), it took direct pressure from the Federal Reserve Board to get the banks to cough up cash. Chairman Alan Greenspan rushed to Washington … vowing the Fed’s “readiness to serve as a source of liquidity to support the economic and financial system … In the end, the Fed committed more than $10 billion.The story behind the October market crash is a disturbing one. The innocent bystander, the taxpayer, wound up paying for the excesses of others. How could we have let our economic institutions slip so far? (158-159)

Back then it “only” cost $10 billion to bailout the markets and thaw out the credit freeze. This time around, the tab is $700 billion. Why so much more now? Because we didn’t learn the lessons of that earlier crisis. Like a subprime borrower with an adjustable rate mortgage that keeps resetting higher and higher, we kept putting off the pain and putting off the pain until the whole house of cards collapsed.