Paul Jacob

I get confused about the economy as much as the next guy. For days — indeed, weeks — I can go about my life without understanding what the Sam Hill is going on.

The bad news is I’m not alone.

The worse news? Our leaders are not only just as confused as you and me, but they actually manage to cause much of our mutual confusion.

Case in point: The way our leaders have been talking, they are spending our future trillions to stimulate today’s economy.

The trouble with talk of stimulus is that it turns out we are not in a liquidity crisis. The trouble is not that banks don’t have, or haven’t had, enough money to loan (hence the talk of “liquidity”). The horrible truth this time around is that banks suffer from accounts that just don’t add up. Their capital appears to have evaporated with the decline in housing prices and the mortgage bubble, leaving them unable to cover future bursts of unpayable loans.

Though our leaders from Bush and Paulson to Obama and Geithner talk about stimulus and liquidity and stuff like that, the eventual and “better” rationale for giving money to the banks was not so that they’d make loans, but that they’d have enough capital to cover future defaults.

Defaults which, alas, appear to be coming in several big waves.

There’s evidence that one of the next waves of economic crises to hit us is the collapse of a whole array of pension funds. It turns out that a lot of managed funds have taken more and more risk in the past few decades. And you know what that means.

As a fascinating article in Reason puts it, there’s been a further destabilizing element added in recent memory: So-called “moral investing.” Goody-two-shoe types have played the piper’s tune and enticed a lot of investors and fund managers to take their lemmings (I mean earnings) and sock them away in businesses that are “good” — not in the sense of profitable or secure, but in the sense of “moral,” “trendy,” or just plain “politically correct.” That makes the funds and the investments themselves less secure, as money has gone from likely winners to pipe dreams.

When pension funds collapse, things can get pretty bad.

Of course, things are looking bad on any number of fronts.

Paul Jacob

Paul Jacob is President of Citizens in Charge Foundation and Citizens in Charge. His daily Common Sense commentary appears on the Web and via e-mail.