An electronic display shows news of an anticipated drop in stocks prices in Times Square in New York on Tuesday, Jan. 22, 2008. (Peter Morgan/Associated Press)

As markets lurched and crashed this week and ordinary people around the world watched big chunks of their wealth slide into the abyss and their economies veer toward recession, President George W. Bush summoned reporters to the Roosevelt room at the White House to announce a new executive order.

Flanked by members of his cabinet, the president explained that he had come to the conclusion many Americans do not understand their personal finances: "How credit cards work, and how credit scores affect you, how you can benefit from a savings account or a bank account."

So, said Bush, he had just established a blue-ribbon panel to advise him on how to further financial literacy.

It was a moment of Forrest Gump clarity in a day of deafening accusations and frightening news.

Campaigning presidential candidates were demanding emergency relief for the new needy. Experts were shouting at one another on cable networks, debating whether recession has arrived. The U.S. Federal Reserve, desperate to thwart a disaster, had just cut the key interest rate three-quarters of a percentage point — the biggest one-time cut in a quarter century. The Bank of America had become the latest financial institution to announce billions in losses, mostly due to American homeowners defaulting on mortgages in the ongoing lending crisis.

Meanwhile, in the Roosevelt room, elaborating on his new plan to educate Americans, President Bush mused: "I just wonder how many people, when they bought a subprime mortgage, knew what they were getting into."

Days of wonder

It is hard to know if Bush was serious. But the answer, anyway, is self-evident: If the millions of Americans who can't make their ballooning mortgage payments today knew that they would be hopelessly indebted and facing foreclosure after just a few years of these new arrangements, most of them, presumably, wouldn't have signed. That too many Americans are spend-happy and unable to see past the next minimum payment on their multiple credit cards is pretty obvious, too.

According to the Federal Reserve, the country's central bank, American consumers collectively owe $2.5 trillion, not including mortgages. That is about $22,500 per household in unsecured debt, roughly $8,300 of which is a credit card balance. Nearly half the people in this country spend more than they earn.

But then, it isn't as if their president or, for that matter, the other branches of government in this country has set a much higher example.

Granted, this is a country that believes more than most in keeping the dead hand of government out of the marketplace, which is one of the reasons it has attracted so much of the world's investment wealth in the first place.

But even most fiscal conservatives believe government has a regulatory role, a duty, in fact, to protect citizens and investors from market predators. And as the American housing market became gradually unmoored from reality over the past several years, precious little regulation was in evidence.

Not a penny down

Just a couple of years ago, in fact, Americans were routinely buying houses without a penny down, sometimes actually borrowing more than the purchase price and pocketing the extra cash at closing.

If the borrower was willing to pay a few more interest points, shady mortgage brokers would see to it that no proof of income or wealth was necessary. Or they would conceal huge fees and steep rate increases down the road a bit from anxious borrowers, rushing them through what amounted to a con job.

Appraisers obligingly overestimated the value of a property being purchased, the better to conceal the shakiness of the deal.

Banks and mortgage companies, collecting a nice fee, looked the other way, too, and then sold the debt to Wall Street, which would bundle it and sell it to suckers on the international securities market, many of whom had been fooled by the triple-A rating bestowed by ratings agencies on the whole mess.

What's more, it was not as though this was all done in secret. The whole time, consumer advocates and local government officials and economists were banging on desks and uttering dire warnings.

Ira Rheingold of the National Association of Consumer Advocates called the whole process "insane." Jim Rokakis, the county treasurer in Cleveland, referred to it as "fraud on an industrial scale."

They may as well have been yelling into a toilet.

A game of risk

Under the stewardship of a president who believed unstintingly in the ability of the market to discipline itself, federal regulators did virtually nothing.

State governments were no better. When, back in 2002, the cities of Cleveland, Toledo and Dayton, Ohio, passed laws cracking down on predatory lending, the free-market warriors in the state legislature immediately reversed them.

Risk is the grease of the American engine, argued the politicians. It is not for the state to protect people from their investment decisions. Caveat emptor.

And now, as a staggering 1.5 million homeowners face the prospect of foreclosure, and the bilge from all that unrestrained greed slops over onto innocent investors here and abroad, sweat is running down the backs of the country's ruling class.

"Explain to us," John Spratt, a Democratic congressman, demanded last week of Federal Reserve Chairman Ben Bernanke, "how it is that a problem so pervasive and so serious was able to crop up, or arrive under the radar without being detected sooner by the regulators?"

Bernanke stared at the budget committee chairman for a moment, and chose diplomacy. "There was a combination of factors," he replied.

The education of a president

Bernanke, his hands tied by circumstances, has really only one weapon left in his arsenal — to cut interest rates, which in effect means to print more money and make it easier for banks to lend.

He has made it clear that he will cut rates again, if necessary, to keep business solvent. Whether it will work is not clear.

Politicians, meanwhile, know an election year nightmare when they see one. Bush is promising fast action (something beyond his new education program) in the form of a stimulation package in excess of $141 billion. Congress is racing to cooperate.

But what exactly is this fix proposed by a president who says too many of his co-citizens don't understand the impact of their own financial indebtedness? Much more government borrowing.

This from an administration that has financed five years of war in Iraq by borrowing from foreign investors while cutting taxes at home. The U.S. government, thanks to Bush and six years of a compliant Republican Congress, is now into the Chinese banks the way the Americans are into the credit card companies.

Spending money

In order to pacify fiscal conservatives, Bush is characterizing the proposed measure as "an economic growth package," consisting of, as he puts it, "giving American consumers back some of their own money."

Basically, though, these are cash handouts — perhaps as much as $800 to individual taxpayers, $1,600 to families, distributed in the desperate hope that consumers will follow their past pattern and immediately spend the money on something, anything, rather than put it against some of that colossal household debt.

Because Bush will not tolerate increasing taxes on the well-off, and isn't proposing spending cuts, there is only one place he can get the money, which is the same well he has gone to so many times before: "The president wants to borrow money from the international community," says James Thurber, a professor of government at American University in Washington, DC. "He doesn't state it that way, but he'll have to do it if he doesn't raise taxes or cut popular spending programs."

Bush's administration, says Thurber, "thinks it can go to heaven without dying, meaning that they can cut taxes and borrow and there will be no consequences."

As for the financial Wild West of the past few years, Thurber says: "It's a strong argument that we need government, and we need regulation, and that unrestricted laissez-faire capitalism doesn't work."

Back in the Roosevelt Room this week, Bush made no such concessions. He just talked, almost wistfully, of how he wants "America to be as hopeful a place as it can be. We want people owning assets. We want people investing. We want people owning homes.

"But oftentimes," he went on, "to be able to do so requires literacy when it comes to financial matters."

And so, by executive order, the education begins, if a tad late.

Letters

Excellent piece! This article should be given out to every realtor and prospective purchaser of houses and condos, especially those who think they can make a profit at someone else's expense.

This real estate crash is long overdue, it's just a shame that people with reasonable levels of debt, and sensible investments are getting burned as well.

– Tony Clark | Brampton,Ontario

Mr Macdonald has written a wonderful piece, as usual. First rate in every way. More please.

– D. J. Murray | Richmond BC

Neil - your story on debt and the Bush solution was amazing - and as a Canadian who recently moved to the US, I can say nowhere in American public discourse is the real gravity of these issues being contemplated whatsoever. Americans seem to be quite effective at avoiding them, living in a state of perpetual cognitive dissonance.

The scarier issue is that the detachment from reality is going to catch up with all of us.

– Colin Grier | Pullman, Washington

Thank Neil Macdonald for an excellent appraisal on our failed long neocon nightmare without end. These imbeciles cling to discredited laizzez faire conservative economic and social principles elucidated by the likes of Leo Strauss and first popularized by President Ronald Alzheimer.

They rob our children's future to enrich themselves and the remora fish corporate plutocracy which has so thoroughly corrupted a true democracy that once was a beacon to the world.

There are many of us in the states who are so ashamed of this unraveling fiasco. The sad fact is that 50% of the voting population chose this incompetent microcephalic man.It is not much fun living in an empire that is circling the drain.

– Hugh Owens | Jackson,WY

An excellent piece by Macdonald. Yes, the writing's on the wall. There certainly appear to be dark clouds over the U.S. (and by extension Canada and most of the world) what with the unfolding credit crisis, phenomenal deficits and indebtedness of the U.S. government as well as its citizens, the housing crisis, and the devaluation of currency, potential Enrons, not to mention industrial pollution and global warming.

It will take a long time before we can get out of this mess. I thinks now is the time to take a step back and assess the type of society we want to have, the type of values which our progeny will take with them when they grow up to become bankers, lawyers, CEOs, administrators, and politicians.

What do we expect our children to learn, when they see the rank consumerism and materialism all around them. Lets get our act together and become good human beings first. The rest will take of itself.

– Nasir Khan | Markham, Ontario

This is a fantastic summation of the fiscal nightmare going on. Thank you Neil.

What would be an excellent addendum to this piece would be a discussion on the mechanics of how the Fed Reserve, in printing more money for US government to cover their annual spending, impacts dollar value, confidence in currency, and the global shifts in capital to China (and other debt buyers) and back. I'm a bit lost, but trust (after reading your article) that you could do it justice.

Great work!

– Dominic Bortolussi | Toronto

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