Just How Big is This Economic Crisis? And How Did “We” Not Notice it Coming?

David Brooks puts into perspective just how grandiose the current, on-going economic bailout is.

Over the past year, the federal government has poured money into the economy hundreds of billions of dollars at a time. It has also guaranteed investments, loans and deposits worth about $8 trillion. Barry Ritholtz, the author of “Bailout Nation,” points out that this project constitutes the largest infusion in American history.

If you add up just the funds that have already been committed, you get a figure, according to Jim Bianco of Bianco Research, that is larger in today’s dollars than the costs of the Marshall Plan, the Louisiana Purchase, the New Deal, the Korean War, Vietnam and the S.&L. crisis combined.

Paul Krugman chastises the Establishment for not noticing the economic freight train that has been approaching at top speed for the past few years:

A few months ago I found myself at a meeting of economists and finance officials, discussing — what else? — the crisis. There was a lot of soul-searching going on. One senior policy maker asked, “Why didn’t we see this coming?”

There was, of course, only one thing to say in reply, so I said it: “What do you mean ‘we,’ white man?”

Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories?

Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world?

Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?

He answers that they did see it coming, but that no one wanted to be the party pooper.

Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?

[After the crisis of 1997-98] everyone declared a victory party over our pullback from the brink, while forgetting to ask how we got so close to the brink in the first place.

…investors came to believe that Mr. Greenspan had the magical power to solve all problems — and so, one suspects, did Mr. Greenspan himself, who opposed all proposals for prudential regulation of the financial system.

Now is the time, says Krugman, to begin to prevent the next catastrophe.

Yet the experience of the last decade suggests that we should be worrying about financial reform, above all regulating the “shadow banking system” at the heart of the current mess, sooner rather than later. For once the economy is on the road to recovery, the wheeler-dealers will be making easy money again — and will lobby hard against anyone who tries to limit their bottom lines.

Michael Porter, a Massachusetts Republican from Harvard Business School, who worked with the Mitt Romney presidential campaign, thinks that we still have the problem of looking at economics from a fragmented and incoherent political and short-term tactical perspective, rather than from a strategic perspective.

Government leaders react to current events piecemeal, rather than developing a strategy that unfolds over years. Congress and the Executive Branch are organized around discrete policy areas, not around the overall goal of improving competitiveness. Neither candidate has put forward anything close to a strategy; rather, each has presented a set of disconnected policy proposals with political appeal. Both parties contribute to the problem by approaching the economy with long-held ideologies and policy positions, many of which no longer fit with today’s reality.

Ironically, while other countries understand the importance of fair competition, America is shrinking from the competetive.  While we have been falling back to focus on short-term gains, other countries are increasing college education, reinvestment in science and technology as a means to foster entrepeneurship, and they spend an increasing share of GDP on research and development.  In a “me-me-me” consumerism society, this is not surprising that we are falling behind.