Thoughts on the crisis

Historians will argue back and forth over the causes of the current economic crisis, just as they still argue over the causes of the Great Depression. But there is consensus on some points:

• The U.S. government wanted to increase home ownership among Hispanic and African Americans. Since it was politically unacceptable to impose racial quotas on mortgage money, this could be done only by pressuring banks to relax lending practices, even to the point of eliminating down payments (!). The rules were thus loosened across the board for everyone.
• The increase in home buyers set off an inflationary spiral that became self-perpetuating. People bought houses with the intention of reselling them at a much higher prices.
• The rising house prices fuelled demand for housing construction. Entire exurbs of McMansions were being built until the crisis began.
• The Federal Reserve kept all of this going by providing lenders with cheap money.

In sum, the boom kept going as long as enough people could borrow enough money to buy more and more homes at higher and higher prices.

It couldn’t go on forever. On the one hand, wages have not kept pace with housing prices, not to mention the rising cost of oil and food. On the other, mortgages were being given to people who were, by any honest measure, insolvent.

Will the crisis be resolved by the proposed $700 billion bailout? This one might be resolved, at least for now. But the same kind of speculative bubble could happen elsewhere in the economy for similar reasons. The U.S. economy is increasingly geared to creating illusory value.

In all fairness, the bailout may buy time to dismantle the bubble economy before more damage is done. The U.S. government could stop badgering lenders to relax their lending criteria. The Federal Reserve could stop providing cheap money. The speculators and deadbeats could be stripped of their ill-gotten gains.

It won’t happen.

What then? A full-blown recession will likely be averted for another two years. By then, any further bailout would reach astronomical figures and simply drag down those who were wise enough to shun speculation and improvidence.

When I was an undergrad, I remember reading a Marxist book on economics. Among other things, it argued that the boom-bust cycle is inevitable. Once a boom has set in, decision-making becomes less and less optimal. Market discipline slackens and incompetence increasingly goes unpunished. Even if you do get fired or if your company goes under, you can always get rehired elsewhere. Many people also take advantage of the boom to make money through pure speculation, and they will do their utmost to keep the boom going until speculation has become the main driving force. Why not? It’s their bread and butter … or rather their cocaine and cognac.

And so, the longer the boom goes on, the greater the load of inefficiency that the economy has to bear. Eventually a crisis becomes inevitable and even desirable … to clean all the gunk out of the system.

But there is another wrinkle to the current boom-bust cycle. It is playing out against the backdrop of a worsening commodity crisis. Demand is increasing faster than supply for the basics of life, particularly oil, food, and water. Resource-rich countries will be all right. But things will be less rosy for areas that have a high ratio of people to resources, like the Eastern U.S., California, Western Europe, and many areas of the Third World.

Nonetheless, many of these same areas have embarked on a program of aggressive population growth through immigration. The U.S. is projected to grow by 135 million in just 42 years—a 44% increase (Camarota, 2008). The United Kingdom is slated to grow by 16 million in 50 years—a 26% increase (United Kingdom – Wikipedia).

This situation might be manageable if the immigrants were going into export sectors that can earn foreign exchange and pay for increased imports of oil, food, and water (yes, fresh water will become an item of international trade). But they aren’t. For the most part, they are being brought in to serve the needs of agribusiness, slaughterhouses, landscapers, homebuilders, hotel and restaurant services, and so forth.

Yes, we are living in interesting times.

Reference

Camarota, S.A. (2008). How many Americans? The Washington Post. Tuesday, September 2, 2008; Page A15