Picturing the recession

Imagined or not, its effects are very real.

Pop psychology and economic projection make strange bedfellows. In an interview with The Washington Times last week, campaign advisor to Sen. John McCain and UBS vice chairman Phil Gramm described America’s economic woes as a “mental recession,” proceeding to gripe indecisively about how we’ve “sort of become a nation of whiners.” We ought to be ashamed if he is to be believed, because our catastrophic imaginations ran amok in the two days after the interview appeared in print.

The problems started on Friday, when plunging stock value of financial cornerstones Fannie Mae and Freddie Mac spurred rumors about an impending buyout by the government. The purpose of these companies is to keep the nation’s mortgage market running, and they share the burden of owning or guaranteeing about half of it. On fears that Fannie and Freddie were falling victim to the same credit troubles that sunk Bear Sterns and Countrywide Financial, the government sprung into action and provided the means to stave off disaster.

Friday also saw the disastrous ruination of IndyMac bank. In what was described variously as the second or third largest bank collapse in U.S. history, IndyMac folded under what Office of Thrift Supervision Director John Reich described as a “liquidity crisis.” The bank reopened Monday under federal control and immediately faced Depression-era bank runs.

Regardless of the extent to which Mr. Gramm is correct in his analysis, there can be no denying that the economy is in need of more than a smattering of optimism, because the consequences of the allegedly imaginary recession are very real. As much as $1 billion belonging to IndyMac’s clients may have been lost as a result of its collapse, and taxpayers stand to lose $4-8 billion in the FDIC-financed rescue. Had Fannie Mae and Freddie Mac suffered the same fate, taxpayers would have ended up paying an estimated $1 trillion dollars in bailout money. These grim realities are becoming more and more apparent. It seems testament to the power of human imagination.