The Financial Crisis – Part One
September 21st, 2008
As a futurist, I view the financial crisis that exploded last week from a high level, long term perspective. The macro forces that are reshaping our world must be considered when such a crisis occurs. In addition this particular crisis will force us to reevaluate long held economic ideals that may no longer have validity in their purest forms.
It is important to state that there are many traceable causes to this crisis. It is these particulars that politicians and those that need to blame something or someone will focus on as a way to justify a point of view or to seek retribution. There will be much argument about who is to blame and what needs to be done to protect the U.S. and global financial system from further meltdown. This is an important discussion to have, as long as there is perspective and an honest desire to right the ship rather than to just be right.
There have been financial crises in the past that can be looked at for guidance and for reassurance. Guidance in how to handle what now confronts us, and reassurance that we can and will weather this crisis. The Great Depression has been mentioned a lot this past week, as it was the specter of such a calamity that provoked the actions made by the Fed and the Treasury Department . This was due in part to the fact that Ben Bernanke is regarded as an authority on this historical economic event. Perhaps a more pertinent crisis to view is the banking crisis of Sweden in the early 1990s. In that crisis there were a number of similar trend lines relative to housing and the investment portfolios of banks to the current crisis. The Swedes suffered economic pain, but did exit the crisis to once again become a vibrant economy.
The first high level view of this financial meltdown is to state that economic and political ideal philosophies cannot exist in their ideal state when submitted to actual human endeavor. In the last century, the lofty, egalitarian ideals of communism and socialism attracted many people. Unfortunately, whenever they were manifested in a governmental form, they failed. The Soviet Union and Communist China collapsed because they did not value the dynamics of market economics and because the theory of equality gave way to self interest. It was thought that a central planning committee could manage the economy, which proved to be woefully wrong. It was stated that all for one and one for all and that all citizens were comrades and equal, yet inevitably the members of the communist parties had privileges in life that non members did not have, and the higher up the party hierarchy the more favors and luxuries one had. So, the ideal of equality and centralized planning failed in its humanly manifested governmental forms.
The other dominant economic ideal is that the Market in unregulated form is the truest form of capitalism and is to be trusted to create the greatest good. Adam Smith instead of Karl Marx. However, whenever a government pushes toward this ideal, at least in recent times, there is failure and crisis. It is clear to all observers that the current financial crisis is due to a combination of greed at all levels and a total lack of checks and balances and regulation of new financial instruments and practices. The free market direction under Reagan led to the S&L crisis and the RTC. The current financial deregulation under Clinton and Bush led to whatever this crisis will end up being called. The Bush administration was so caught up in the “ownership society” that it didn’t want or try to put in checks and balances that might get in the way of everyone owning a home no matter what.
There obviously is a need for the hand of government in capitalism. This is particularly the case in this new global economy where everything is so interconnected. The question is finding the minimum amount of involvement and intervention that still allows capitalism to thrive but also avoids the greed generated melt downs we have experienced. I am sure there are many libertarians that are conflicted due to the fact that the government intervention might have saved them from losing all of their life savings.
The other, larger view point on the crisis is relative to the fact that we are entering a new age. This age, the Shift Age is the global stage of human evolution. We have moved passed national boundaries and now the only remaining boundary is planetary. At the beginning of a new age there is great disruption as new structures and new dynamics replace old ones. This was seen in the 1970s when the era of “stagflation” and extended recession occurred as the Information Age supplanted the Industrial Age. The filters through which we view the world become outdated and we need to find ones so that we can see more clearly. We need to find new metrics that provide a greater degree of accuracy in evaluating what is actually going on in the global marketplace. This will be the subject of the next column on the current financial crisis.
September 22nd, 2008 at 11:51 am
I think I have some disagreement with you here. I think this notion that government involvement should be “minimal” is one of the classic rightwing mistakes.
Part of the problem we’re now facing is the huge redistribution of incomes UP. The spending power of the poor and middle class have been seriously eroded, and that is certainly part of the reason that housing prices are falling. Let’s remember that the interest rate resets we were worried about didn’t carry nearly the negative punch that was feared because the Fed has been driving interest rates down.
But people have less money. Energy costs more; food costs more; commodities cost more. But wages aren’t going up. That’s part of the reason for the housing meltdown, and it will be a bigger reason when we have the credit card security meltdown, which may be around the next corner.
Government has got to not only focus on cleaning up the financial institutions’ balance sheets; it also has to be sure that wages for the poor and middle class allow a growing standard of living. That means government infrastructure work; it means stronger unions; it means a higher minimum wage; and it certainly means federalized health care that solves a problem for workers and employers alike.
That’s not a formula for smaller government; it is a formula for a healthier economy and a healthier society. Purveyors of what has become conventional wisdom will definitely not like it, but we won’t get our arms around this problem until that conventional wisdom changes.
September 22nd, 2008 at 12:35 pm
Mike-
Good point. What I meant was, ‘minimal’ in terms of the failed central planning of the failed communist states and minimal relative to the pork barrel stuff special interests get politicians to legislate. Check and balances with a social conscience for all citizens that in no way favors special interests or religious belief systems.
David
September 24th, 2008 at 10:53 am
Laissez-faire assumes that “booms” and “busts” will occur. The libertarian assumes that a maximally efficient system will sometimes destroy all of their life savings, yet will provide the most efficient economy for them to live in over the course of their lives. The laissez-faire, free-market libertarian has the mental capacity to accept “healthy destruction” in the economy on occasion, even if it means they are homeless once in awhile. Few people have this mental capacity however, which may explain why there are so few Libertarians. David, this means I don’t believe that libertarian are conflicted in any way.
As for the “long view”: nations as organizations are becoming weaker, cash as a concept is evolving and high net wealth individuals and the CPA in charge of individual trust fund are starting to get more directly involved in running their investment lifecycles. Think of the “armchair trader” concept brought to the next level. Who needs the stock market when education, information technology, social networks and peer support enable individuals to seek out their own investment opportunities directly instead of paying middlemen such as Lehman Brothers to do it for them in a least-common-denominator nationalized (globalized) system? My direct experience tells me that the money is still out there, but it is just being utilized differently! I believe we are witnessing an evolution in investment management, and information-heavy societies like the United States are the first to bear the consequences of this evolution. For instance, I believe Lehman Brothers was left with too many “worthless” equities and not enough “healthy” ones to balance out their portfolio because investors weren’t leveraging the likes of Lehman Brothers like they used to. Their business model has simply changed in a way to make them obsolete, and the market has reflected that fact (even if no one knows consciously why they shorted that unfortunate company in the way they did).
If the Fed props up this industry, it should not do it for long. Allow it to die, though it may be a good thing that we let it die a little slower than at avalanche speed.
September 25th, 2008 at 3:19 pm
OK .. so we all know that a lot of really bad real estate loans were made. The political class would sure love for us to believe that the blame here rests squarely on mortgage brokers and lenders. The truth is that most of the blame rests on political meddling in the credit decisions of these mortgage lenders.
Twenty years ago the buzz-word in the media was “redlining.†Newspapers across the country were filled with hard-hitting investigative reports about evil and racist mortgage lenders refusing to make real estate loans to various minorities and to applicants who lived in lower income neighborhoods. Frankly, the claims that evil mortgage lenders were systematically denying loans to blacks and other minorities were a lot sexier than claims that when credit histories, job stability, loan-to-value ratios and income levels were considered there was no evident racial discrimination.
Political correctness won the day. Washington made it clear to banks and other lending institutions that if they did not do something .. and fast .. to bring more minorities and low-income Americans into the world of home ownership there would be a heavy price to pay. Congress set up processes (Research the Community Redevelopment Act) whereby community activist groups and organizers could effectively stop a bank’s efforts to grow if that bank didn’t make loans to unqualified borrowers. Enter, stage left, the “subprime†mortgage. These lenders knew that a very high percentage of these loans would turn to garbage – but it was a price that had to be paid if the bank was to expand and grow. We should note that among the community groups browbeating banks into making these bad loans was an outfit called ACORN.
These garbage loans to unqualified borrowers were then bundled up and sold. The expectation was that the loans would be eventually paid off when rising home values led some borrowers to access their equity through re-financing and others to sell and move on up the ladder. Oops.
Right now this crisis is being sold to the American public by the left as evidence the failure of the free market and capitalism. Not so. What we’re seeing is the inevitable result of political interference in free market economics. Acme bank didn’t want to loan money to Joe Homebuyer because Joe had a spotty job history, owed too much money on his credit cards, and wasn’t all that good at making payments on time. The politicians told Acme Bank to figure out a way to make that loan, because, after all, Joe is a bona-fide minority-American, or forget about opening that new branch office on the Southside. The loan was made under politicial pressure; the loan, with millions like it, failed – and now we are left to enjoy today’s headlines.
So … why aren’t you reading the whole story in the mainstream media? Come on, are you kidding me? Do you really expect the media to blame this mess on deadbeat borrowers and political interference in the free market when it is so easy to put the blame on greedy lenders and evil capitalists? Remember … there’s an election going on. One candidate is decidedly anti-capitalist. Do the math.
September 26th, 2008 at 1:49 pm
Ideology needs pragmatists and pragmatists need ideology. This crisis reflects a failure of the
two to check and balance each other. Ideolgists were
allowed to run amuck.
As an aside I find the image of the homeless libertarian
somewhat amusing because it is so improbable; I’ve never met one who did not have a pragmatic streak