In the brand-spanking-new issue of the Economist's Voice, economist and Nobel Prize laureate Joseph Stiglitz takes a look back at a paper he wrote almost 20 years ago "commenting on the move -- just beginning then -- towards securitization."

(Securitization is the process of turning an asset into an security, as in, most famously, a group of mortgages into a mortgage-backed security contract that can then be bought or sold or further divided and redivided in all kinds of innovative ways.)

After recapitulating some unkind words about the "incompetency of banks" as proven by "a series of disasters -- "real estate loans ... loans to Third World countries, oil and gas loans," Stiglitz unburdened himself of some qualms about the possible downstream effects of securitization and their potential "perverse incentives."

...When banks retained the mortgages which they issued, they had greater incentives to screen loan applicants. The brokers who write the mortgages often receive commissions on the loans they write, with little or no accountability on their efficiency in screening. Their incentives are thus only to ensure that the loans meet (on paper) the requirements of the loan... [T]he broker has an incentive to find an appraiser who will appraise the property accordingly. The question is, has the growth in securitization been a result of more efficient transactions technologies, or an unfounded reduction in concern about the importance of screening loan applicants? It is, perhaps, too early to tell, but we should at least entertain the possibility that it is the latter rather than the former.

In other words, what would happen once neither brokers nor bankers had an incentive to ensure the loan-worthiness of loan recipients, once all the loans were packaged up into securities and resold to Norwegian townships or New York hedge funds?

"We now know the answer," writes Stiglitz.

Get this man on Paul Volcker's Economic Recovery Advisory Board, ASAP!

A citation for the original paper: Stiglitz, Joseph (1992) "Banks versus Markets as Mechanisms for Allocating and Coordinating Investment," in J. Roumasset and S. Barr (ed.) The Economics of Cooperation.

A message from General Xu Tianliang, director of the political department of China's National Defense University, published in the People's Daily on November 10, and translated by the Chinese Media Project, under the title "The most uplifting leftist harangue in recent memory."

We must persist in the unshakable position of Marxism in the ideological sphere, promoting the popularity of contemporary Chinese Marxism, firmly establishing the basic theoretical foundation of socialist ideology; we must unshakably persist in the great ideals of communism and the common ideals of socialism with Chinese characteristics, holding high the great banner of socialism with Chinese characteristics... We must unshakably persist in the central task of building civic morals, so that the socialist view of honor and shame becomes the guiding principle of the behavior of all citizens.

And so on. CMP's David Bandurski warns us not to over-titter; he contends that General Xu's op-ed is "an an open challenge to pro-reform leaders on the eve of a critical anniversary" -- the 30th anniversary of "Deng Xiaoping's re-emergence and the onset of economic, social and political reforms."

Maybe so, although I will require more edification in what precisely is meant by the "socialist view of honor and shame" before I am convinced. But I agree with Bandurski, General Xu's call for building "a modern transmission system with Chinese characteristics" is worth taking seriously.

Numerous facts have revealed that in this age of rapid development of information technologies, whoever has mastery of cutting-edge transmission methods, and whoever's transmission capabilities are strongest, can achieve more widespread transfer of their thinking, culture and value concepts, and thereby more effectively influence the world.

Of course, as anyone who has watched a 13-year-old put a new cellphone through its paces, the implications of the above paragraphs are that teenagers will rule the world (if they are not already its tyrants.) No one masters cutting-edge transmission methods better than a teenager. And on that note, we must segue effortlessly, if unexpectedly to what looks to be a student composition written in answer to a Chinese essay question: What would Ultraman do if he succeeded in wiping out all the monsters in the world? (Ultraman is the hero of a long-running series of Japanese children's TV shows).

The composition, translated by Danwei must be presented in full:

If I were Ultraman, the best would be Ultraman Ace. I'd keep peace in the universe. I wouldn't be like my brothers, fighting monsters in Japan all day. I'd universalize "peace-keeping." I'd set up hotlines in all the major countries of all the continents in the world, so that I'd be able to make it there whenever something happened. And I'd fight the aliens who invaded Earth, and I'd also take the initiative and defeat the strongest Baltans who have their eye on Earth. And I'd patrol all throughout the galaxy, rooting out everything that would harm Earth. Of course, I couldn't simply rely on myself, a single Ultraman, to accomplish such a large-scale monster destruction. I'd have to unite the world of Ultra and start up a military service, and then bring the fine suggestions of Earth's Marxism-Leninism, Mao Zedong Thought, and Jiang Zemin Theory to the world of Ultra so that they can excel at both thought and combat. And build a harmonious universe, which needs to start from the very young. So bring up good "little Ultras."

To be able to unite the universe and keep peace is my greatest desire.

Italics mine. I just want everyone to stop and think about what the consequences would be of a generation of Chinese teenagers transmitting and proselytizing Mao Zedong Thought and Jiang Zemin Theory on the Internet of the future. Where's Ultraman when you really need him?

Incidentally, I once gave an Ultraman action figure to a friend for his birthday and discovered that he'd been a big fan of Ultraman as a kid growing up in Hawaii. But I did not realize until today just how incredibly voluminous Wikipedia's online Ultra resources are. (You can start here.)

I think, for example, that Borges would have found the following paragraph delightful:

At present, Tsuburaya Prod. accepts 36 Ultramen as official (counting Ultraman Legend, the combined form of Ultramen Cosmos and Justice, as a separate entity). This figure does not account for Thai-produced Ultramen. (The figure is 38 if you count Next, Noa, and Nexus as separate entities -- it has been revealed in Nexus that all three are a single being with various modes used by different hosts.) In 2001, the Ultra Series was cited in the Guinness Book of World Records as the record-holder for the most number of spin-off shows.

This figure does not account for Thai-produced Ultramen! Color me, impressed. Clearly, we need not worry about Mao Zedong Thought-spouting teenagers with Chinese characteristics. Ultraman otaku have already conquered the commanding heights of the Internet. Deng Xiaoping can rest content. No matte what challenge is mounted by the likes of General Xu, the battle is already over.

For further edification, I leave you now with the theme song to 1972's "Ultraman Ace," as sung by the Misuzu Children's Choir, which oddly sounds something like the Red Army Choir, although higher pitched.

But even more charming, I think, is the theme song to 1997's "Ultraman Dyna."

Need to rehabilitate a career after utterly humiliating and disgracing yourself in front of the world? Get an online column at Slate!

First came Henry Blodget, the go-go securities analyst for Merrill Lynch who symbolized, more than anyone else, the corrupt relationship between Wall Street analysts and the companies they covered during the dot-com boom years -- and got himself banned from the securities industry for life for his efforts. How he reinvented himself as a China expert for Slate, I still don't fully understand.

But now comes an even bigger disgrace, Eliot Spitzer, the former governor of New York and high-end prostitute patron. He has some thoughts to share on the the financial bailout. For the most part, I agree with him -- a Wall Street built from smaller companies could be more competitive on the world stage, and simply shoveling billions at existing mega-corporations to maintain the status quo doesn't seem like a forward-thinking policy.

But fundamentally, I'm just flat-out impressed. What do you have to do in this country to absolutely, completely, ruin your long-term income-generating potential? Americans are a forgiving bunch.

A side-note: The New York Times humorously points out that, as governor, Spitzer triggered Blodget's fall from grace by publishing "e-mail messages in which Mr. Blodget disparaged stocks he had positively assessed in public."

Readers are asking quite reasonable questions about what would happen to General Motors  retirees in the event of a G.M. bankruptcy. The short answer, I think, is that they're pretty much screwed however this game plays out, bankruptcy or no bankruptcy. It's hard to see how we can avoid facing up to the fact that we have three automakers who have far too much capacity to build cars that Americans don't want to buy. One way or another, they are going to have to consolidate and shrink. Factories will close, more workers will lose their jobs and continuing to find cash to pay for legacy benefits will be a major struggle.

The only ways out are two, to my mind, equally unlikely outcomes: A) The U.S. government hands over $40 billion to G.M., Ford and Chrysler, and they somehow manage to pull off a miraculous turnaround pumping out hybrids and electric cars (Go Chevy Volt!) that brings them back to profitability in short order, or B) the U.S. government itself takes over the responsibility of providing retiree benefits. I don't think the management of the Big Three has proven itself capable of executing such a business plan, and I'm doubtful the U.S. government has the guts to just step in and bail out workers and retirees. (Although I'm open to having my mind changed.)

The issue of how to pay UAW retiree benefits was supposed to have been settled in 2007, when the UAW made a series of concessions that ensured new auto industry hires would be paid on a scale that was competitive with what foreign carmakers operating in the U.S. pay their workers, in return for the establishment of a new retiree healthcare fund called a Voluntary Employee Beneficiary Association. VEBA was supposed to start taking over the distribution of benefits in 2010, but somehow, the auto companies suddenly find themselves lacking the cash they were supposed to endow the VEBA trust with.

The UAW understands all too well the plight the automakers are in -- they're not selling any cars -- which is why UAW president Ron Gettelfinger announced on Wednesday that the UAW was willing to allow the automakers to delay putting money into the VEBA trust.

The automakers argue that the vast expense of paying for the legacy benefits of hundreds of thousands of retired workers is the main reason they haven't been able to compete with foreign carmakers. This is difficult for me to reconcile with the memory of the record profits G.M. and Ford were making just half a dozen years ago. But never mind: One way to look at their request for bailout cash is as a gambit to get the U.S. government to hand over billions of dollars that can be used to cover those legacy costs while the industry retools. This raises an obvious question: Why bother with a middleman? Why doesn't the government just take over retiree benefits directly!

If only the Big Three had listened to Walter Reuther, the legendary longtime leader of the UAW, long before the specters of foreign competition and high gas prices pummeled them into submission. There is no better time than right now to return to "The Risk Pool," a fantastic article Malcolm Gladwell wrote for the New Yorker two years ago that tells the story of how Detroit initially saddled itself with responsibilities it can no longer afford.

In 1950, Walter Reuther, the president of the UAW, was negotiating a new contract with "Engine" Charlie Wilson, the CEO of G.M.

The two men had already agreed on a cost-of-living allowance. Now Wilson went one step further, and, for the first time, offered every G.M. employee health-care benefits and a pension.

Reuther had his doubts ... His inclination was to fight for changes that benefitted every worker, not just those lucky enough to be employed by General Motors ... The labor movement believed that the safest and most efficient way to provide insurance against ill health or old age was to spread the costs and risks of benefits over the biggest and most diverse group possible. Walter Reuther, as Nelson Lichtenstein argues in his definitive biography, believed that risk ought to be broadly collectivized. Charlie Wilson, on the other hand, felt ... that collectivization was a threat to the free market and to the autonomy of business owners. In his view, companies themselves ought to assume the risks of providing insurance.

And thus was written into stone the eventual doom of General Motors. Because what happened, in the long run, is that G.M.'s legacy responsibilities grew as its actual workforce shrank.

Technology led to great advances in productivity, so that when the bulge of workers hired in the middle of the century retired and began drawing pensions, there was no one replacing them in the workforce. General Motors today makes more cars and trucks than it did in the early nineteen-sixties, but it does so with about a third of the employees. In 1962, G.M. had four hundred and sixty-four thousand U.S. employees and was paying benefits to forty thousand retirees and their spouses, for a dependency ratio of one pensioner to 11.6 employees. Last year, it had a hundred and forty-one thousand workers and paid benefits to four hundred and fifty-three thousand retirees, for a dependency ratio of 3.2 to 1.

If Reuther's advice had been followed, and healthcare and company pensions had, for example, been effectively nationalized, fluctuations in the fortunes of any single company would not affect a worker's access to benefits. Even better, companies would be better able to compete in a global marketplace.

So, how do we ensure that workers and retirees don't get crushed by the implosion of the Big Three? Simple. Any bailout, restructuring or government-overseen bankruptcy should be accompanied by comprehensive healthcare reform for all workers, along with substantial improvements in the safety net such as wage insurance, extended unemployment benefits, training and education subsidies.

Riding my bicycle last night through Oakland, I almost veered off the road when I saw a gas station advertising $1.86 a gallon for regular unleaded. I always assumed that a severe economic downturn would pummel oil prices and delay the advent of peak oil, but I have to concede that I never thought I would see gasoline for under $2 a gallon in California again in my life. The price of crude oil to be delivered in January on the New York Mercantile Exchange, as of this writing, is $47.47, a full hundred dollars a barrel lower than it was in July! As energy analyst Geoffrey Styles noted on Monday, "Oil remains a cyclical business, as anyone who's been around it for a while understands, but this is ridiculous."

Even so, low gas prices have done absolutely nothing for American automaker profitability. Whether this is because consumers are smart enough to realize that during the lifetime of whatever car they purchase right now, gas prices will inevitably surge back up again, or whether it's simply, as the auto industry claims, a result of a cratering economy, there is no getting around the reality that the November sales figures, as economist James Hamilton documents, are extraordinarily bad:

I was running out of vocabulary last month to describe just how bad October was for the domestic automakers. But whatever you want to say about October, November was significantly worse.

When I first saw the figure for November sales of cars manufactured in North America -- 236,000 units -- I thought maybe somebody had mistyped the first digit. Even 336,000 would have been a very bad month. But 236,000 is 17 percent below the dreadful October figure and 40 percent below the number sold in November of 2007.

In 2007, Hamilton adds, G.M. recorded a loss of $37 billion -- and that was before the bottom dropped out of the economy. This year looks to be considerably worse. In the restructuring plan G.M. presented to Congress on Tuesday, G.M. also declared: "The company's balance sheet ... includes a ($60) billion negative net worth position at September 30, 2008." By any standard, that's a pretty big hole to dig yourself out of. I am inclined to believe G.M.'s execs when they say that without help, they cannot remain a going concern.

G.M. says it needs $4 billion this month to keep going and another $4 billion in January. And that's just for starters. In return for all the cash, the company promises that it will accelerate development of fuel-efficient cars, trim the number of brands it produces, and extract cost-cutting sacrifices from all of its stakeholders. (Already, the UAW is promising concessions from labor.)

(You can read the plan here, and a sharp summary from Time's Justin Fox here. My favorite part: G.M.'s promise to "immediately" cease "all corporate aircraft operations, unfortunately impacting approximately 50 hourly and salaried employees." Translation: All those mean comments from politicians about CEOs flying their jets from Detroit to Washington are going to mean we have to lay off a bunch of pilots and airplane mechanics.)

But what do we make of this? "With Federal support, GM will invest significantly in reinventing the automobile, with special emphasis on fuel efficiency, energy independence, and reductions in greenhouse gas emissions." (Sounds kind of like G.M. is asking to be made a subsidiary of the Sierra Club, doesn't it?)

Better late than never? Frankly, I don't think such promises mean anything, absent rigorous government control and requirements. G.M. asks for the creation of an oversight board, but that's thin gruel. The sales figures, the state of the economy, the strategic errors Detroit has made over the years all add up to a pretty compelling conclusion. There's no way out for the Big Three as currently constituted, and depending on management beholden to shareholders, as Felix Salmon argues this morning, is a fool's game. I do believe that simply allowing the companies to collapse would be an unbearable body blow to the current U.S. economy, but I have joined the ranks of those who don't trust Detroit to fix itself, no matter how much the feds loan the car manufacturers. It's time for a government-administered Chapter 11 bankruptcy that fundamentally restructures the American auto industry.

But of course General Motors says in its own restructuring plan that bankruptcy is absolutely, positively not an option because of the "stigma" such an action would incur "in the eyes of consumers."

On this latter point, it cannot be emphasized strongly enough how much a bankruptcy will depress sales of an auto manufacturer's products due to consumer fears of long-term warranty, resale value and service-related issues.

Earth to G.M.: No one is buying your cars right now! Your business is kaput. How much more stigma can bankruptcy add than your own mismanagement has already spawned?

Times are tough all over! The Wall Street Journal reports that Google, "one of the most extravagant spenders of the boom years," has finally "begun to tighten its belt."

Even some employee perks are getting cut:

In recent months, it reduced the hours of its free cafeteria service and suspended the traditional afternoon tea in its New York office.

Now, I have had lunch at Google and I can tell you that cutting back on the hours for what was already a crowded mob scene is nothing to sneeze at. (Unless you are sneezing at the hand-ground pepper on your freshly tossed salad.) As for afternoon tea service -- I stand by my long held belief that this would be a much more civilized world, if all companies took a break for high tea (cucumber sandwiches are a right, not a privilege!) Maybe the Obama administration can do something about this.

But if this is what a rough patch at Google looks like, the company is still offering "a fantasy version of what the corporate workplace environment could be," as I wrote in "The Google Brain" a little over a year ago. Crumpet, anyone?

The story so far: In 2006, in the post "A Tree Grows in the Sahel," I wrote about the amazing reforestation work pioneered by a farmer in Burkina Faso, Yacouba Sawadogo. In August of this year, Charles Mann's terrific piece on dirt in National Geographic brought us up-to-date on some unfortunate news about Sawadogo's efforts to hold on to his land. Salon readers expressed the desire to help, and a not insignificant amount of money has been raised to assist Sawadogo.

Yesterday Charles Mann provided some updates on Sawadogo's situation, one from himself, which I've excerpted below, and a note from the researcher Chris Reij, who has been publicizing Sawadogo's efforts for decades.

Mann:

Dear Friends of Yacouba Sawadogo,

This is from Charles Mann, the author of the article in National Geographic that inspired you kind people to think about helping Yacouba Sawadogo keep his land....

Many of you sent money to Dr. Reij, either directly or through me, for which I thank you all -- it is a wonderful thing to do. I am attaching a short note from Dr. Reij and Dr. Mathieu Ouedraogo about their visit to Yacouba in October...

Again, my thanks to all, wherever you are. Receiving your notes, each expressing the wish to help a stranger, has been wonderful. Here in the U.S., it's coming up to a holiday of giving. But to me it feels like the best of the holiday has already been happening.

Best wishes,

Charles Mann

Reij:

Short visit to Yacouba Sawadogo on October 14, 2008

In Burkina Faso I tried to find out what the current situation is regarding the fields of Yacouba. The story is quite complex. The town of Ouahigouya now recognizes Yacouba's rights to his land, but the current legislation requires him to get an official and registered land title. Everyone getting an official land title has to pay a registration fee, which is calculated on the basis of each m2 of land and how this land is categorized ... urban land, rural land, commercial land and some categories in-between. How much Yacouba will have to pay for the titling of his land will depend on how his lands will be classified.

I met with a traditional chief, who is close to the mayor and the town council -- and he mentioned that they are well aware of the high international profile of Yacouba and of his achievements. That certainly strengthens his position. Showed this chief the French copy of the National Geographic and mentioned that this is read in China, France, the USA and all over the world.

My colleague Mathieu Ouedraogo will follow-up with the mayor and the town council in an effort to ensure that Yacouba gets his title at the lowest possible costs. We have not yet mentioned to Yacouba that he is about to receive some financial support. It seems better to do so when the final amount of support is known and when we get the info about the costs of land titling. Will send all readers of this note the info as soon as it becomes available.

Mann also noted that anyone else interested in helping out contact him through his Web site.

What does a recession look like?

On Tuesday morning, Mark Thoma hosted a rant by fellow economist Tim Duy taking apart a silly column in the Wall Street Journal by Peggy Noonan. For the full point-by-point analysis, I refer you to Duy. But after reading the following two paragraphs from Noonan, I can't contain my own response.

I am thankful for something we're not seeing. One of the weirdest, most perceptually jarring things about the economic crisis is that everything looks the same. We are told every day and in every news venue that we are in Great Depression II, that we are in a crisis, a cataclysm, a meltdown, the credit crunch from hell, that we will lose millions of jobs, and that the great abundance is over and may never return. Three great investment banks have fallen while a fourth totters, and the Dow Jones Industrial Average has fallen 31% in six months. And yet when you free yourself from media and go outside for a walk, everything looks . . . the same.

Everyone is dressed the same. Everyone looks as comfortable as they did three years ago, at the height of prosperity. The mall is still there, and people are still walking into the stores and daydreaming with half-full carts in aisle 3. Everyone's still overweight. (An evolutionary biologist will someday write a paper positing that the reason for the obesity epidemic of the past decade is that we were storing up food like squirrels and bears, driven by an unconscious anthropomorphic knowledge that a time of great want was coming. Yes, I know it will be idiotic.) But the point is: Nothing looks different.

Really? On Saturday, Nov. 22nd, I arrived at the Oakland International Airport around midday. I had allowed plenty of time, because I've been flying out of the Bay Area to New York for Thanksgiving for 20 years, and the airports are always big, congested messes.

Not this time. No traffic coming into the airport. No line to check bags. No line at security. I mean this literally: there were no lines at a major airport on the Saturday before Thanksgiving. I remarked to the woman checking us in that I'd never seen the airport that empty. She gestured down a line of empty counters beside her. Five airlines had pulled out of the Oakland airport this year, she told me (among them, ATA, Aloha, Skybus, and American Airlines). JetBlue, she said, had cut its daily flights out of Oakland from 22 to 9.

As we turned away from the check-in counter, my daughter muttered, "well, that's a reality check."

Indeed.  Yes, airlines have been hit particularly hard by the downturn, since the oil price surge forced them to sharply raise prices just when Americans found themselves least able to afford to fly. But the empty Oakland airport is just one example. Sorry Peggy, but you really don't have to look very hard to see an economy in sharp decline. And if you use your imagination you might even be able to envision how things could look a year from now, if our circumstances continue to deteriorate.

It's amazing Republicans kept power as long as they did.

When confronted with the news that Wal-Mart shoppers were so eager to take advantage of a Black Friday sale that they trampled an employee to death, most people are, quite naturally, appalled. My daughter, for example, was aghast: "What kind of country do we live in?" she asked, over and over again, unable to fully process the horror.

I have an answer to her query, but it is unlikely to satisfy her: We are a country that is supposedly desperately in need of more shoppers. Consumer spending makes up 70 percent of the economy, and consumer spending is  undergoing a sharp, economically destabilizing decline. The less we shop, the worse it gets. No shoppers equals declining profits for businesses equals layoffs equals even fewer Americans with the wherewithal to shop. And so on. This vicious circle has led some observers to declare that shopping is an act of patriotism. Who can forget George Bush encouraging Americans to shop after 9/11? Ask not what your country can do for you, but what you can shop for your country!

One can even make the case that the Wal-Mart shoppers were especially rational consumers. Prices are absurdly low for a vast array of consumer items right now, and when money is tight, taking advantage of discounted offerings is not only prudent but a two-fer! Good for the economy and good for your pocketbook.

Seen from this light, the Wal-Mart stampede, while horrible and obscene in its localized impact, might also seem to be exactly what the entire economy needs. And come on -- the carnage is easily avoidable; just do your stampeding online. Give Santa a hand: Christmas is just three weeks away, and your friends and relatives aren't the only ones lusting after a present -- so is the U.S. economy!

But before you click that buy button, here are a few things to think about. First, it's not clear that snapping up discounted flat-screen TVs does anyone much good. Although retailers attempted to make hay out of numbers that showed Thanksgiving shoppers spent more this year than last year, several analysts pointed out, in their best Grinch fashion, that there isn't much profit to be gained for retailers when prices are cut low enough to entice shoppers in a foul economy. Second, when an economy is in free fall, the truly rational individual decision is to save, pay off your debts and hunker down till the storm blows over. Even if you are debt-free and cash-rich right now, it still might not make much sense to be a red-white-and-blue shopping maniac. All indications are that next year will be worse than this year, and you're going to feel pretty stupid if you do your part for the national economy this Christmas, and then find yourself laid off in January. Third: Suppose Americans do rush to the mall or Amazon.com this Christmas -- it's still unlikely that they will be able to effectively counteract the current recessionary headwinds. The numbers are just too bad. We are living through no ordinary business cycle downturn -- this has the potential to be the worst recession most of us have encountered in our lives. A reckoning is at hand.

There's only one shopper with a purse large enough to make a difference in this kind of mess -- and that's the U.S. government. It's time for Uncle Sam to go to the mall.

On Sunday, the New York Times' Louis Uchitelle laid out the numbers. The best guess is that the economy is currently contracting at a rate of 4 percent per quarter. (UPDATE -- I bungled this, the 4 percent is per year, not quarter.)  (It could be worse. I've seen some estimates that go as high as 7 percent.) Uchitelle reports that "offsetting that contraction requires a federal infusion of at least $400 billion."

Just for fun, try dividing $400 billion by the roughly 300 million population of the United States. It comes out to about $1,333. If every man, woman and child spent $1,333 dollars above and beyond what they are currently spending, we could, maybe, pull the economy back up to zero growth. But, of course, it's ridiculous to imagine every American having the cash to go on a spending spree like that. We got into this whole mess by using cash extracted from wildly appreciating home equity valuations to buy whatever we needed or wanted, from healthcare to a new SUV to a second home. That's gone. For American consumers to buy $400 billion worth of goods now would require maxing out a ton of credit cards, and digging themselves even deeper into debt at a time when credit card companies are raising interest rates as fast they can.

But let's suppose you are not underwater on your mortgage, you don't have any credit card debt, you're gainfully employed, and you are staring at a $499 price tag for a 32-inch flat screen HDTV from Sony? Where's the harm in a little consumer gratification that might lend a helping hand, however pitiful, to the larger economy -- if you can afford it?

Doesn't that decision depend on just how bad you think things will get in the future? Right now, the U.S. economy is shedding about 250,000 jobs a month. That number will undoubtedly go up. Are you really so confident that your earning power next year is secure enough that you can blithely ignore a blistering recession? Remember, purchasing discounted consumer electronics isn't going to help out the larger economy that much. What this economy really needs is for Americans to start buying fully tricked-out Chevy Tahoes and Ford Expeditions again. And that's just not going to happen in the near future, for a variety of reasons, chief among them: You'd have to be friggin' crazy to think that buying an expensive car right now is a smart economic decision, no matter how low the price of gas gets.

But then we get smacked in the face again by the paradox of the American economy. All those individual Americans making smart economic decisions have brought the economy to a grinding halt. The smarter we are, the worse it gets.

It sure seems like the current predicament is a case where a reliance on free-market economics built on individuals' exercising rational choice breaks down. Doing what seems best for the individual is sending an ailing economy spiraling down to the hospice. But to jump-start the economy, we're asking everyone to go out and spend their cash at exactly the time when it seems most sensible to stuff it under the mattress.

Cue the federal government. Since it is government's responsibility to take care of the collective, the government is the only actor in the economy that can make the rational decision to spend hundreds of billions of dollars creating jobs and giving individual Americans the necessary confidence, and foundational support, to be active consumers once again. And that doesn't mean another round of tax breaks, which most of us will use to pay off our credit card debt or sock away in savings accounts. It means buying bridges and roads and public transportation systems and schools and hospitals and alternative energy plants and whatever else seems to make sound infrastructural sense.

Yes, we do need a shopping stampede -- but in Washington, not Wal-Mart.

It would be tempting to blame Ben Bernanke's bleak assessment of the current economic situation, in a speech in Austin, Texas, on Monday, for yet another debilitating market swoon -- the Dow closed down 679.95 points -- but it would also be unfair, even if the most precipitous portion of the plummet came after he finished speaking. As I noted earlier today, there are plenty of good solid reasons for investor despair right now, and we don't need downbeat pronouncements from the Fed chair to make us feel any gloomier. Sorry to say, but a 680 point drop in the Dow is a quite rational response to the current crisis.

Nonetheless, there was an interesting tidbit in Bernanke's speech that could inspire despair in a segment of the population that probably overlaps quite neatly with fat cat investors: the beleaguered acolytes of Milton Friedman.

On Saturday, Paul Krugman noted that Friedman's greatest contribution to the economic corpus, "A Monetary History of the United States," co-written with Anna Schwartz, argued that the Great Depression could have been averted if the Federal Reserve had moved more quickly to expand "the monetary base" (which Krugman defines as currency plus bank reserves). But Krugman observes that in this crisis, the Fed has been "spectacularly aggressive" in expanding the monetary base and so far, "it doesn't seem to be working."

(UPDATE: In the original version of this post I embarassingly confused Schwartz with Rose Friedman,  Milton's wife, with whom he co-wrote "Freedom to Choose.")

"I think the thesis of the Monetary History has just taken a hit," writes Krugman.

In Bernanke's speech on Monday, he talked about the speed with which the Fed had lowered interest rates.

By way of historical comparison, this policy response stands out as exceptionally rapid and proactive. In taking these actions, we aimed not only to cushion the direct effects of the financial turbulence on the economy, but also to reduce the risk of a so-called adverse feedback loop in which economic weakness exacerbates financial stress, which, in turn, leads to further economic damage. Unfortunately, despite the support provided by monetary policy, the intensification of the financial turbulence this fall has led to a further deterioration in the economic outlook.

In other words, despite being "exceptionally rapid and proactive," the Fed's effort doesn't seem to be working.

Expanding the monetary base and lowering interest rates aren't exactly the same thing, but they are both monetary policy tools employed to goose an economy into expansionary action. So the lesson to be drawn from their simultaneous failure is identical. Monetary policy alone will not get the U.S. back on the right economic track. Massive government spending is back in fashion, as are the theories of John Maynard Keynes, whose star went into eclipse as Friedman's ascended ever higher.

And that's a topic we will be returning to in considerably more detail as the weeks go by.