Sunday, October 26, 2008

Economic Meltdown Next

Alan Greenspan now says nobody could’ve predicted the scale of the current banking meltdown. Meanwhile, the Maestro, as he once was called, who guided the economy with a “magic touch” during his long tenure blithely ignored every indicator that trouble was brewing. He is correct, of course; nothing like this has happened since 1929, and moreover, probably wouldn’t have happened if the banking reforms put into place in response to that calamity hadn’t been eviscerated ten years ago under Clinton’s watch.

For certain, everybody who didn’t have a personal vested interest in being optimistic, was pointing out extreme imbalances and deficiencies in the economy that were likely to have serious, if not necessarily catastrophic, consequences. People involved in reporting on and opining about the business news invariably own stocks and are totally sold into the conventional wisdom so unconsciously project optimism in their reporting. You know: “All we need is a few trillion dollars to bail out the banks and they’ll start trusting each other and then they’ll start lending as before and people will be borrowing just as in the past and in a couple of quarters the world economy will be back on track.”

They also assure us that we can’t have another Great Depression because we ‘responded’ quickly with huge bailouts and because there are now programs in place to protect individuals from the extreme deprivations of the thirties. As to the latter: Thank God for small miracles; people will at least have something, small as it may be – I get $600 month in Social Security; how far will that get you in America? - to help negotiate the hard times.

The bailout may have led bankers to feel a lot better about themselves and the security of their exorbitant pay, but even if it was enough to get them loaning money again, not many will want to borrow.

Let’s face it, anybody with half a working brain cell who isn’t part of the wealthy elite, is hoarding their resources, saving for a rainy day, learning how to get by on less (if not yet, then soon). That being the case, industrial production will plummet, housing construction will grind to a halt, any business that depends on discretionary spending - restaurants, etc – will see their profit margins reduced to the bone, governments will be starved for revenue and be forced to cut back on services… you get the picture.

There’s no going back to bubble-like days of prosperity predicated on figmentary money created out of whole cloth or based on borrowing from the future. Recent precipitous falls on world stock markets show that investors are catching on that this is not a temporary detour on a strong upward economic path; a mere glitch in the endless growth paradigm.

This is going to hurt, as well it should. Americans, amongst all the world’s rich peoples, have been living beyond their means and the ability of the earth to provide for their insatiable appetites. It had to come to an end. For sure, it would’ve been a lot smarter and easier and more sensible to gradually transition to a more stable, sustainable lifestyle, but there’s nothing in the world, that is, no amount of reason or logic, that could’ve stopped this juggernaut from destroying itself in an orgy of excessiveness and exuberant irrationality.

Thankfully the entire neo-con, unfettered free market, trickle down economic regime is crashing and burning after a long and bruising binge… while also leaving a hangover that has created a monumental headache for the world.

Europe is closer to getting the message than the US. When the former bought stakes in tottering banks they took voting power, in some cases, voting control of the institutions. America purposely took no voting rights: I guess that would be too much like socialism to take control over institutions that you’ve just showered with Joe Sixpack’s money. Bush and the Democratic Congress wanted to preserve the ‘Free Market’.

The American economy is going to languish in the doldrums for a long time. I’m hoping against hope it’ll emerge in an entirely new and sustainable context. With oil prices hitting rock bottom this is our last chance to convert at a reasonable cost. Petroleum won’t stay cheap for long. World population is growing along with their aspirations. If China’s growth slows to half last year’s pace there’ll still be millions of new cars on their roads every year. Electricity demand in lowly Cambodia, currently supplied 90% by fossil fuel, is growing at 25% a year in spite of 80% of its people not even being connected yet.

There’ll need to be massive New Deal type public works programs and welfare – that dirty word - for the destitute and people simply experiencing hard times. There’ll need to be a sharing of available private-sector jobs else unemployment really will approach Depression era levels. There’ll need to be publicly financed mortgages for low income people. And there’ll need to be higher taxes on everyone but the poorest else public debt become an unsustainable burden and public works be impossible to finance. Let’s not forget that America experienced some of its most prosperous times during the fifties and sixties when income tax rates on the wealthy stood at 91%.

As most of you reading this I’m hopeful that Obama will rise to the occasion. That he will bring the country together in a way that takes the hardest edge off of hardscrabble times. In no manner will it be easy, but at least he won’t emulate Hoover saying giving food to hungry Americans will hurt their self-reliance.

For certain, dynamic and fascinating times are ahead.

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