David Roberts recently said about the current financial crisis:

• Nobody clearly understands how we got in this situation.
• Nobody clearly understands what situation we are in.
• Nobody clearly understands what’s going to happen next.

The first and second were, I think, serious errors. Dean Baker predicted this back in September of 2002 and explained what situation we were in, and how we were getting into it:

If housing prices fall back in line with the overall rate price level, as they have always done in the past, it will eliminate more than $2 trillion in paper wealth and considerably worsen the recession. The collapse of the housing bubble will also jeopardize the survival of Fannie Mae and Freddie Mac and numerous other financial institutions.

Baker was no Lone Ranger either. Lots of people — Paul Krugman and Duncan Black (Atrios) — pointed this out. And there seems to be wide agreement that this is not a “liquidity crisis” where people simply lack the cash to pay debts — a kind of extended bank run. Most agree that this was a real bubble where loans far exceed the value of what people borrowed against . One other thing Baker points out about this crisis. Whatever happens, the economy is not “losing value.” That value was lost the day loans were made on assets worth far less than the loan amount. What we are doing is recognizing the loss and deciding who will absorb how much of it.

In general the people who predicted the problem share Black’s, Baker’s, and Krugman’s view; those who were surprised by it, who thought that the fundamentals were sound, and who helped cause the problem, think otherwise. I personally think it makes sense to trust the former over the latter.

Now as to what happens next, Roberts is right. Nobody knows exactly. But we know something. It is almost certain there is a lot of toxic garbage still uncounted. No doubt when the next big institution fails, Paulsen will act surprised at this as well.

What do we do about it? Well Dean Baker has smart suggestions on this as well. It is a long and wise article, so I won’t even try to summarize. But the essence is to make failing institutions take as much responsibility as possible, and to minimize misery to ordinary people. He suggests not only ways to minimize taxpayer losses from the bailout, but key regulations that can lower the risk of this happening again. His proposals are not perfect — but I’d take them over both Paulsen’s and the current Democratic alternative.

Incidentally if the Democrats show their usual spinelessness and inability to say no to GOP Daddies in nice suits screaming "emergency," they should not think Republicans won’t take political advantage. As a prominent Republican once said, bipartisanship is date rape. Patrick Ruffini gave away the endgame if Democrats are stupid enough to fall for it:

Republican incumbents in close races have the easiest vote of their lives coming up this week: No on the Bush-Pelosi Wall Street bailout.

God Himself couldn’t have given rank-and-file Republicans a better opportunity to create political space between themselves and the Administration. That’s why I want to see 40 Republican No votes in the Senate, and 150+ in the House. If a bailout is to pass, let it be with Democratic votes. Let this be the political establishment (Bush Republicans in the White House + Democrats in Congress) saddling the taxpayers with hundreds of billions in debt (more than the Iraq War, conjured up in a single weekend, and enabled by Pelosi, btw), while principled Republicans say “No” and go to the country with a stinging indictment of the majority in Congress …

In an ideal world, McCain opposes this because of all the Democratic add-ons and shows up to vote Nay while Obama punts.

Are the Democrats really going to sacrifice the election in order to hand $700 billion over to the Bush teams? Dodd, Schumer, Reid, and Pelosi all act like they won’t. But even while seeming to fight they have already accepted a great deal of the Republican frame. Who knows? Maybe this time Charlie Brown won’t let Lucy hold the ball while he tries to kick it.

As a last point I want to extend something Roberts said in his post:

I don’t ever want to hear again about how expensive renewables are. If we have $3 trillion for a pointless war and $750 billion to clean up the messes made by biz school grads playing with funny money, we by God have enough money to get off fossil fuels. It’s a matter of will, not cost.

A damn good point. But also an opportunity. All the arguments against a massive green deal have just been rebutted. Not only do we have the money, but the idea that we can leave the important stuff to the non-existent “free market” is exploded. The idea that we can afford to continue letting the masters of the universe continue to run everything damn well ought to be dead.