Economic update

Here's an update to yesterday's post.

I was listening to the radio when I got home from work last night, and just heard an NPR report that the Federal Reserve has just announced an $85 billion loan to save insurer American International Group. Why did the feds decide to bail out AIG and not Lehman Brothers? Your guess is as good as mine.

Meanwhile, NPR also reports that US stock markets made a partial recovery from yesterday's slump after the Fed kept something called the federal funds rate at 2 percent. This is the rate that banks charge each other for overnight loans.

Also, the Associated Press reported that "Barclays says it will acquire Lehman Brothers' North American investment banking and capital markets businesses for $250 million in cash."

All this economic uncertainty is apparently causing oil prices to drop. Less economic growth equals less demand for oil which equals lower prices. At the same time, the BBC reports that the US federal deficit is likely to go up to $438 billion in 2009--and that doesn't include the cost of rescuing Freddie Mac and Fannie Mae.

This complicated stuff has a lot to do with the well being of ordinary people. Dean Baker offers a good explanation of how we got into this mess--and some ways that we can get out of it.

With the demise of Fannie Mae, Freddie Mac, IndyMac, Bear Stearns and now Lehman Brothers, we’ve been treated to the failure of more major financial firms than during any year since the Great Depression. The sight of rich bankers getting the boot might be lots of fun if it were just a spectator sport. Unfortunately, we are in the game with these clowns.

As a result of their incompetence, irresponsibility and greed, the housing bubble was allowed to grow to dangerous proportions. Its collapse threw the economy into recession, putting millions of people out of work and lowering the wages of those who still have their jobs. The plunge in house prices has destroyed much of the life savings for tens of millions of people nearing retirement.

Meanwhile, the bankers who messed up and destroyed the companies who hired them are still multimillionaires. Most of them are still in their old jobs getting multimillion-dollar pay packages. This is a sector that badly cries out for reform and there is no better time than now to put it into place.

Baker says that the public has a right to expect substantial reforms in return for the federal bailout. Baker calls for a cut in executive pay, and also for a financial transactions tax to help rein in speculation.

The entire post (which I found via truthout) is fairly short, easy to understand, and well worth reading. Baker gives a more complete explanation of the financial transaction tax here.