Treating the Symptoms, Not the Disease

David Leonhardt draws some great parallels between the Chrysler bailout of 1979, the import quotas Reagan slapped on Japanese cars in 1980 and our government’s current efforts to save the financial system. At the time Lee Iacocca was hailed as the saviour of the American auto business.

The Chrysler bailout may have saved the company, but it did nothing, after all, to stop Detroit’s long, sad decline. The bailout and import quotas fooled the automakers into thinking they could keep doing business as usual. In 1980, Detroit sold about 80 percent of all new vehicles in this country, according to Autodata. Today, it sells just 45 percent.

There is a similar chance for us to be fooled about the extent of today’s problems. Some day, house prices will stop falling and the financial markets will calm down. But the underlying problems aren’t going away on their own.

At its core, the current crisis stems from two problems. Regulators, starting with Alan Greenspan, assumed that a real estate bubble couldn’t happen and that Wall Street could largely police itself. And households, struggling with incomes that haven’t kept up with inflation in recent years, said yes when those lightly regulated banks offered them wishful-thinking loans. No bailout can solve either problem.

I have argued for a long time that the combination of a country unable to live on what it earns and an easy money unregulated financial system would be a toxic brew. We better figure out a way to save more and consume less pretty quickly, because the “easy money” part of this formula is over.

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